Slowing US growth and policy divergence are reinforcing the weaker-dollar theme

Overview

The report discusses why the weaker-dollar trend continues to build. Nomura combines weakening US growth and inflation, relative data performance, central-bank policy divergence, long-term yield management, Fed independence, and market positioning to maintain its medium-term bearish view on the dollar, while noting that US equity inflows, energy prices, and carry trades could still provide temporary support for the currency.

Core views

Nomura has shifted more explicitly bearish on the dollar since July 17 and has continued to add positions in this direction. The initial rationale included declining US inflation, the likelihood that upcoming inflation data would remain moderate, expectations that the Fed would keep rates unchanged, and the potential unwinding of dollar-long positions. The report states that dovish signals delivered at the post-FOMC press conference on July 29 US Eastern Time, together with possible joint US-Japan FX intervention on July 30 and 31 to support the yen, subsequently drove the dollar significantly lower. However, Nomura believes this did not mark the end of the theme, but rather a continued expansion of the weaker-dollar thesis. The first reinforcing factor is growing market concern about a US economic slowdown. Nonfarm payrolls have missed expectations for two consecutive months, with the latest July figure at -23K and June revised down to +20K. July retail sales, released on August 14, also showed a contraction in consumer demand. The second factor is the widening economic data surprise differential between the US and other major economies, with recent European data delivering more upside surprises relative to the US. The report uses early 2025 as a historical reference: US survey data slowed markedly at the time, the Atlanta Fed's GDPNow estimate once projected first-quarter 2025 growth at -2.8%, and the dollar index fell by more than 3% in March 2025. Nomura therefore believes that relative economic data, rather than US data alone, have important explanatory power for the dollar's direction. The third factor is that low inflation and weak growth may together extend the period during which the Fed remains on hold. Nomura's US economics team expects July core PCE to remain moderate at 0.2% month-on-month, with the data scheduled for release on August 26. August core CPI will be released on September 11, and slowing rent- and tariff-related components may offset upward pressure from higher prices for electronics and consumer electronic equipment. The report also notes that methodological adjustments to certain core PCE components on September 30, combined with seasonal factors, could create further downside inflation risks. If inflation remains moderate and economic data weaken, market pricing for rate hikes will become more difficult to sustain, reducing rate-based support for the dollar. The fourth factor is the US effort to limit increases in long-term yields. The US Treasury announced that it would at least double its buyback operations for 10- to 30-year Treasuries, indicating greater sensitivity to rising long-term rates. The market is focused on the possibility that the 10-year yield could break above the psychologically important 5% threshold, as a nonlinear rise could hurt US assets such as housing and equities. However, the report argues that suppressing the long-end term premium could also reduce demand for Treasuries and thereby weigh on the dollar. If policymakers continue to prevent rates from rising, subsequent measures could include reducing the size of long-term bond auctions, canceling certain auctions, or even addressing the "crowding-out" problem created by surging debt issuance from artificial intelligence companies. The fifth factor is concern about the Fed's credibility and independence. Lower inflation and weakness in some economic data may ease the credibility controversy triggered by the Fed's decision to keep rates unchanged in July, but the report believes that independence risks have instead increased. Its evidence includes reports that President Trump repeatedly called Warsh and renewed efforts to remove Powell and Cook. The countervailing risk is that Fed Chair Warsh could adopt a more hawkish stance at the Jackson Hole symposium from August 27 to 29 to re-establish policy credibility, or retract the post-July FOMC suggestion that rising market rates could reduce the need for Fed tightening. The sixth factor is that the market remains broadly long the dollar. Following joint US-Japan FX intervention, some dollar-long positions were unwound, but this was concentrated mainly in USD/JPY. Nomura's CFTC non-commercial net-positioning indicator and CTA analysis continue to show that the market is broadly long the dollar and short currencies such as the euro and New Zealand dollar. If the narrative of US macro deterioration continues to strengthen, or if the US Treasury and government further suppress US interest rates, these crowded long positions may continue to unwind and amplify the dollar's decline. The report also retains several factors that could provide temporary support for the dollar. Foreign capital continues to flow strongly into US equities, at levels close to those seen when the "US exceptionalism" narrative prevailed in 2024. Global energy prices remain elevated, the Strait of Hormuz is largely closed, and the US may soon take significant action against Iran. Some FX carry trades have also been re-established since early August following joint US-Japan intervention. These factors may delay the dollar's decline, and Nomura says it will continue to monitor them, but they have not yet changed its medium-term view. Over the medium term, Nomura remains bearish on the dollar. Its economics team believes signs that US growth is slowing relative to other major economies are materializing. At the same time, the Fed may keep rates unchanged while other major central banks, including the ECB and BOJ, continue raising rates. Over the next 12–24 months, some large investors may still reduce their allocations to US assets, with the recent decline in foreign purchases of US Treasuries in TIC data viewed as supporting evidence. Foreign investors still hold substantial US assets, and if the US growth advantage diminishes or markets again become concerned about artificial intelligence capital expenditures and debt expansion, the current strong portfolio inflows may be difficult to sustain. If downward momentum in the dollar strengthens, foreign investors may also increase FX hedges involving dollar sales, as they did in the second quarter of 2025, creating further pressure. At the trade level, Nomura has raised its conviction in short USD/CNH to 4/5 since July 17, established a short USD/THB position, and maintained a long EUR/INR position, with conviction of 3/5 in both. It also maintains a short GBP/NZD position with 3/5 conviction, which the report believes could also benefit from dollar weakness. Given downside risks to the dollar, improving technology-sector sentiment, renewed foreign equity inflows, and the currently low hedge ratios of Taiwanese life insurers—which still have room to increase their FX hedging—Nomura has initiated a new short USD/TWD trade with 3/5 conviction, targeting 31.0 by end-November, or approximately 3%.

Analysis framework

The report first reviews the formation of its bearish dollar view since July 17 and the initial validation provided by policy events at the end of the month. It then examines US growth, cross-economy data surprise differentials, inflation and monetary policy, long-term yield management, Fed independence, and market positioning in sequence. It subsequently tests countervailing factors through equity flows, energy prices, and carry trades, before translating its medium-term macro view into specific currency pairs, conviction levels, and a USD/TWD target.

Methodology notes

• Macroeconomic framework

  Comparison of economic data surprise differentials across economies

  The report compares the performance of data relative to expectations in the US, Europe, and other economies, and combines this with the decline in US growth expectations and the concurrent movement in the dollar index in 2025 to assess how changes in relative growth affect the dollar's direction.

• Event strategy and behavioral financeEvent-driven analysis

  Policy and intervention event analysis

  The report evaluates how events including FOMC communications, joint US-Japan FX intervention, US Treasury buyback operations, and Jackson Hole speeches alter rate expectations, policy credibility, and FX demand.

• Event strategy and behavioral financeFund flow/positioning analysis

  CFTC, CTA, portfolio flow, and FX hedging analysis

  The report uses CFTC non-commercial net positioning, CTA indicators, foreign equity and Treasury flows, and institutional hedging behavior to determine whether dollar-long positions are crowded and assess potential liquidation pressure.

• Fixed income and credit analysisYield curve analysis

  Long-term US Treasury yield and term-premium analysis

  The report examines the 5% threshold for the 10-year yield, buybacks of 10- to 30-year Treasuries, and potential auction adjustments to analyze how suppressing long-term rates could affect Treasury demand and the dollar.

• Macroeconomic framework

  Policy divergence among major central banks

  The report uses the relative policy paths of the Fed keeping rates unchanged while the ECB, BOJ, and other major central banks continue raising rates to explain the medium-term thesis that the dollar's rate advantage may narrow.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US dollar (USD)

  The report's core research subject, with a weaker medium-term outlook.

  Strengths

  Strong foreign inflows into US equities, elevated energy prices, and the re-establishment of carry trades could provide support.

  Weaknesses

  Weakening US growth and inflation, inferior relative data, a narrowing policy-rate advantage, pressure on long-term yields, and crowded long positioning.

  Comparison

  Recent US economic data have been relatively weaker than European data.

  Risks

  A renewed hawkish shift by the Fed or persistently strong flows into US assets could delay the dollar's decline.

• USD/CNH

  Nomura maintains a short position and has raised its conviction since July 17.

  Strengths

  The principal high-conviction expression of a short-dollar view.

  Comparison

  Conviction level of 4/5, the highest among the trades listed in the report.

  Risks

  Support for the dollar from equity flows, energy, and carry trades could cause adverse volatility.

• USD/THB

  Nomura has established a short position to express its weaker-dollar view.

  Comparison

  Conviction level of 3/5.

• EUR/INR

  Nomura maintains a long position.

  Comparison

  Conviction level of 3/5.

• GBP/NZD

  Nomura maintains a short position and believes it could benefit from dollar weakness.

  Comparison

  Conviction level of 3/5.

• USD/TWD

  Nomura has initiated a new short position to express its weaker-dollar view and Taiwan-related flow and hedging thesis.

  Strengths

  Improving technology-sector sentiment, renewed foreign equity inflows, and the low hedge ratios of Taiwanese life insurers, which have room to increase hedging.

  Comparison

  Conviction level of 3/5, targeting 31.0 by end-November, or approximately 3%.

  Risks

  A renewed strengthening of the dollar or a failure by Taiwanese life insurers to increase FX hedging could weaken the trade thesis.

Key data

• July US nonfarm payrolls-23KBelow expectations for the second consecutive month
• Revised June US nonfarm payrolls+20KRevised downward
• Atlanta Fed GDPNow estimate for the first quarter of 2025-2.8%Used by the report to illustrate the significant weakening of US growth expectations in early 2025
• Dollar decline in March 2025More than 3%Occurred concurrently with the deterioration in US relative economic data
• July core PCE forecast0.2% month-on-monthRounded basis, scheduled for release on August 26
• August core CPI release dateSeptember 11Slowing rent and tariff components may offset rising consumer electronics prices
• Date of methodological adjustments to certain core PCE componentsSeptember 30Methodological changes and seasonality may increase downside inflation risks
• US long-term Treasury buyback planAt least doubleTargeting 10- to 30-year US Treasuries
• Key psychological yield for the 10-year US Treasury5%The report believes a breakout could lead to a nonlinear rise and hurt US assets
• Potential window for reducing US asset allocationsOver the next 12–24 monthsSome large investors may reduce their allocations to US assets
• Conviction level in short USD/CNH4/5Raised since July 17
• Conviction level in short USD/THB3/5Position established
• Conviction level in long EUR/INR3/5Maintained
• Conviction level in short GBP/NZD3/5Maintained
• Conviction level and target for short USD/TWD3/5; approximately 3% or 31.0New trade, targeting end-November

Impact & implications

The report believes that weakening US relative growth, inflation, and policy-rate advantages will reduce the appeal of holding dollars. If the Treasury suppresses long-term yields, dollar-long positions continue to unwind, or foreign investors reduce their allocations to US assets and increase FX hedging, the dollar's decline could accelerate. Nomura therefore translates its macro view into several short-dollar and related cross-currency trades, while acknowledging that strong US equity inflows, energy prices, and carry demand could cause temporary reversals.

Risks

• Persistently strong foreign inflows into US equities could continue to support the dollar.
• Elevated global energy prices, the broad closure of the Strait of Hormuz, and potential significant US action against Iran could benefit the dollar.
• The re-establishment of FX carry trades could increase demand for the dollar.
• If Warsh adopts a hawkish stance at Jackson Hole to restore the Fed's credibility, it could reverse some of the dollar's weakness.
• Rising consumer electronics prices could push US core inflation above the moderate path emphasized in the report.

What to watch

• Watch whether July core PCE, released on August 26, remains moderate at 0.2% month-on-month.
• Watch the Fed's policy communications at the Jackson Hole symposium from August 27 to 29.
• Watch August core CPI, released on September 11, and its rent, tariff, and consumer electronics components.
• Watch the September 30 methodological adjustments to certain core PCE components and the impact of seasonality.
• Watch US growth, nonfarm payrolls, and consumption data relative to those of Europe and other economies.
• Watch US equity and Treasury flows, CFTC and CTA dollar positioning, and changes in foreign investors' dollar hedging.
• Watch the US Treasury's subsequent handling of long-term Treasury buybacks, auction sizes, and the 5% threshold for the 10-year yield.
• Watch energy prices, developments in the Strait of Hormuz, US action against Iran, and the recovery of FX carry trades.