U.S. dollar comes under renewed pressure as trend followers turn bearish, Bank of America says

The U.S. dollar is once again facing mounting pressure as trend following investors turn increasingly bearish on the currency, according to a new note from Bank of America (BofA). The shift highlights changing sentiment in global currency markets, where positioning, technical signals, and evolving macroeconomic expectations are combining to weaken the dollar’s momentum after a period of relative resilience.

BofA analysts note that trend followers, including systematic and momentum based funds, have started to rebuild short positions against the dollar. These investors rely heavily on price action and technical indicators rather than fundamental analysis, and their renewed selling suggests that recent dollar strength has failed to establish a durable uptrend. Once these strategies flip direction, they can generate sustained pressure as positions are added incrementally over time.

The dollar’s renewed weakness comes after months of mixed performance. While the greenback benefited earlier from higher U.S. interest rates and its traditional safe-haven status, those supports are now being questioned. Markets are increasingly focused on the timing and scale of potential U.S. monetary policy easing, which could narrow interest rate differentials with other major economies and reduce the dollar’s appeal.

According to BofA, positioning data shows that trend following strategies had previously reduced short dollar exposure but are now reversing course. This shift has coincided with technical breaks in key dollar indices, reinforcing bearish signals for momentum driven investors. As these funds add to short positions, their activity can amplify price moves, particularly in periods of lower liquidity.

Macro developments are also contributing to the change in sentiment. U.S. economic data, while still relatively solid, has shown signs of cooling in certain areas, such as inflation momentum and labour market tightness. This has encouraged speculation that the Federal Reserve may begin cutting interest rates sooner than previously expected. Even the perception of a less hawkish Fed can be enough to undermine the dollar, especially when other central banks are seen as closer to the end of their easing cycles.

At the same time, growth prospects outside the United States have shown tentative signs of stabilisation. Improvements in parts of Europe and Asia have reduced the relative growth advantage that once supported the dollar. While challenges remain in those regions, the narrowing gap has made other currencies more attractive on a relative basis, further pressuring the greenback.

BofA strategists also point to the role of risk sentiment. When global markets are calm and risk appetite improves, investors often rotate out of defensive assets like the U.S. dollar and into higher yielding or growth sensitive currencies. Recent stability in equity markets and tighter credit spreads have contributed to this rotation, weakening demand for the dollar as a safe haven.

Currency pairs most sensitive to trend-following flows have already begun to reflect this shift. The euro and certain commodity-linked currencies have benefited as the dollar softens, while emerging market currencies have also seen some relief. BofA cautions, however, that these moves remain vulnerable to sudden reversals if risk sentiment deteriorates or if U.S. data surprises to the upside.

Despite the growing pressure, the bank does not argue that the dollar is entering a prolonged bear market just yet. Structural factors, including the dollar’s reserve currency status and the depth of U.S. financial markets, continue to provide underlying support. Moreover, any resurgence in global volatility or geopolitical tensions could quickly revive demand for the greenback.

Still, the influence of trend followers should not be underestimated. BofA notes that in past cycles, once these investors commit to a directional view, their impact can persist for weeks or even months. This dynamic can create self reinforcing moves, as price declines attract more selling from systematic strategies, pushing the dollar lower even in the absence of major fundamental news.

For policymakers and global investors, the dollar’s direction carries significant implications. A weaker dollar can ease financial conditions globally, support emerging markets, and lift commodity prices. Conversely, it can complicate efforts to control inflation in the U.S. by raising import costs. These cross currents make the current phase particularly sensitive to shifts in sentiment and positioning.

Looking ahead, BofA suggests that upcoming economic data releases and central bank communications will be critical in determining whether the dollar’s weakness deepens or stabilises. Clearer signals from the Federal Reserve on the policy path, as well as evidence of sustained growth outside the U.S., could reinforce bearish positioning. On the other hand, stronger-than-expected U.S. data or renewed market stress could quickly force trend followers to reconsider their stance.

In summary, the U.S. dollar is facing renewed downside pressure as trend-following investors turn bearish, driven by technical signals, shifting rate expectations, and improving global risk sentiment. While the dollar retains important structural supports, Bank of America’s analysis suggests that near term risks are skewed to the downside, with positioning dynamics likely to play a central role in shaping price action in the weeks ahead.