Investors Brace for Further U.S. Dollar Losses Amid Economic Concerns

The U.S. dollar has experienced a period of stabilization in recent weeks after a record slide earlier this year, but the currency remains in a bearish trend according to many market participants. The dollar index fell around 11% in the six months through June, marking one of its steepest declines on record.

While the greenback has steadied and speculators' net short dollar position has shrunk from its late June highs, concerns over the underlying fundamentals continue to weigh on the currency's outlook. These include the twin U.S. fiscal and trade deficits, the possibility of more aggressive rate cuts from the Federal Reserve due to a sluggish job market, and the view that global fund managers may be in the process of rethinking their FX hedging practices as they look to reduce their exposure to the U.S. dollar.

Analysts believe the forces that drove the dollar's slide remain in place, and further losses are likely. The markets are now starting to assess the degree to which the U.S. economy may weaken and what that could mean for Fed policy, which is expected to resume cutting short-term rates in the coming weeks and continue doing so for the rest of the year. With global investors heavily exposed to American assets, any paring of that exposure could put additional downward pressure on the greenback.