While a temporary truce between the U.S. and China has offered some relief to markets, BofA maintains a bearish outlook on the dollar. The recent bounce is seen as tactical rather than structural, with longer-term headwinds intact.

Key Points:

1. Policy uncertainty persists:
   The pause in trade tensions is temporary. Policy direction remains erratic and could reintroduce volatility later this summer as deadlines and tariff suspensions expire.

2. Lingering economic drag:
   Even with de-escalation, the U.S. economy is now on a slower growth path than pre-trade war due to delayed investment and weakened business confidence.

3. Current account deterioration:
   A narrowing U.S. current account surplus is reducing investment inflows and undermining support for the dollar.

4. Foreign asset reallocation:
   Institutional real money investors are reassessing exposure to U.S. assets and the dollar, contributing to persistent capital outflows.

5. Fiscal uncertainty:
   An unpredictable fiscal trajectory adds risk, with potential implications for long-term Treasury issuance, inflation expectations, and investor sentiment.

6. Weaker-dollar bias from policymakers:
   The Trump administration continues to favor lower rates and a softer dollar, which adds to long-term depreciation pressures.

Conclusion:

BofA remains bearish on the USD, despite tactical reprieves. Structural forces—ranging from weaker capital inflows to policy unpredictability—are seen as increasingly difficult to reverse, suggesting a lower dollar over the medium term with a choppier path forward.

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