Dollar Crashes to 2-Week Low as G7 Looms—Traders Brace for Bloodbath

The greenback’s looking downright pale—hitting its weakest point in 14 days as hedge funds and algo traders pile into bearish bets ahead of the G7’s annual ’let’s pretend we control currencies’ summit.

Market sentiment’s turned radioactive: institutional flows show record short positions against the dollar while crypto volumes spike—because nothing screams ’hedge’ like volatile digital assets backed by memes.

Behind the panic? Whispers of coordinated intervention and the usual suspects jawboning about ’disorderly markets.’ Meanwhile, Bitcoin traders yawn and check their hardware wallets.

Fun fact: this marks the seventh ’most bearish ever’ dollar positioning in the past decade. Spoiler alert—six previous instances preceded violent reversals. But hey, this time is different... right?

Dollar weakens further as US debt, tax cuts and downgrade pile on

There’s more pressure coming from Washington itself. Lawmakers are debating a $4.5 trillion tax cut package that Republicans want to stretch out over a decade. 

The current draft WOULD already cause $3.8 trillion in revenue losses, and that’s got Wall Street staring at the ballooning US budget deficit with a mix of dread and disbelief.

That deficit problem just got worse. Moody’s Ratings stripped the US of its top credit grade last week, citing long-term growth in government debt and interest payments.

The dollar slumped against all ten of its Group-of-10 peers in the first trading session after the downgrade. Bonds and equities barely blinked, but FX traders took the hit personally.

“Rising fiscal concerns are fueling a combined rise in long-end US yields and dollar decline,” said Moh Siong Sim, an FX strategist at Bank of Singapore Ltd. He added that foreign investors are starting to back away from financing the US government’s twin deficits — the fiscal deficit and the trade gap. He said the process of cutting back exposure to American markets “is just getting started.”

In the options market, sentiment is breaking records in the wrong direction. One-year risk reversals on the Bloomberg Dollar Spot Index — which show how much more expensive it is to bet against the dollar than on it — fell to minus 28 basis points. That’s the lowest since Bloomberg began tracking the data in 2011, even worse than during the initial shock of the pandemic in 2020.

Traders go all in on bearish bets as losses widen in 2025

It’s not just about options. In the derivatives space, speculative traders are now holding $16.5 billion worth of short positions against the dollar, based on Commodity Futures Trading Commission figures through May 13 compiled by Bloomberg.

That’s NEAR the most aggressive bearish stance since September 2024. Just five months ago, these traders were sitting on $31 billion in long positions. So why the flip? The market’s trust in Trump’s policy stability is evaporating. His back-and-forth tariff moves are shaking investor confidence.

Even though the US and China announced a temporary truce earlier this month, it hasn’t stopped the dollar bleeding. Bloomberg’s measure shows the dollar has already lost over 6% in 2025, the worst start to a year since the index launched nearly 20 years ago.

“The structural bearish dollar view is still around because the reprieve from trade and China issues is only temporary,” said Kathy Jones, chief fixed-income strategist at Charles Schwab & Co.

And Moody’s downgrade made things worse. The firm pointed to a decade-long rise in federal debt and surging interest costs as reasons for the cut. Markets responded by ditching the dollar, even if stocks and bonds mostly stayed put.

Some investors think the bearish mood is a bit much. With the Federal Reserve taking a more cautious approach and not rushing into policy changes, US bond yields might still hold some ground against international peers. But even those hoping for a bounce admit it won’t mean much if Washington doesn’t pull its fiscal act together… fast.

Cryptopolitan Academy: Tired of market swings? Learn how DeFi can help you build steady passive income. Register Now