HSBC strategist report: Selling the dollar seems to have formed a bubble, and the dollar may not be far from bottoming out

HSBC's strategist team published a report indicating that the dollar sell-off is beginning to resemble a bubble, which, like all bubbles, will eventually burst. The report suggests that traders seem focused on the dollar's sharp decline this year and are inclined to project this trend into future performance, indicating "bubble-like" behavior. The report serves as a warning signal, suggesting that the dollar may be close to bottoming out.

The bank expects the dollar to remain weak in the coming months but believes that the argument for a further significant decline has become "too one-sided." While uncertainty in U.S. policy has eroded the dollar's safe-haven status and intensified the theme of "de-dollarization," the extent of factors supporting further selling pressure has weakened since the U.S. announced reciprocal tariffs in April. Returning to a more traditional framework linking the dollar to U.S. yields may indicate that a dollar bottom is approaching, and a similar correlation between U.S. stocks and yields also shows signs of recovery.

The report also notes that if U.S. policy uncertainty "becomes problematic again" or if the global economy begins to accelerate, the dollar's decline may gain momentum. However, neither scenario is the bank's base case forecast