Synopsis:

HSBC argues that the US dollar is now trading below what rate differentials would imply, pointing to a growing “discount” driven by policy instability and structural concerns. Traditional FX drivers no longer explain the USD’s trajectory, and further weakness is expected against safe havens and the euro.

Key Points:

• USD Undervalued vs Rate Differentials:
  Despite relatively supportive rate spreads, the USD is underperforming, reflecting broader investor discomfort with U.S. policy direction.

• Policy Uncertainty a Key Drag:
  With no clarity on a stable U.S. trade policy regime, investors are pricing in ongoing volatility and geopolitical risk, undermining USD appeal.

• Traditional Drivers Losing Influence:
  Historical relationships like interest rate spreads and economic differentials are failing to explain recent USD moves, suggesting a structural shift.

• Targeted USD Weakness Expected:
  HSBC sees continued downside pressure on the USD versus JPY, CHF, and EUR, where safe-haven and structural flows are strongest.

• Limited Downside in Other Crosses:
  There may be some consolidation in USD crosses where local fundamentals (e.g., in commodity or EM currencies) cap further downside for now.

Conclusion:

HSBC frames the current dollar slump as more than cyclical weakness—it’s a reputational erosion. Until the U.S. restores policy credibility, USD is likely to remain structurally pressured, particularly versus the core G10 safe-haven and funding currencies.