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Recent dollar weakness has generated passionate debate: Is it short-term and tactical or long-term and structural? Citi’s foreign exchange analysts, led by Daniel Tobon, defy consensus and
weigh in favor of cyclical rather than structural factors. The Citi team detect a narrative shift taking place in markets right now from the tariff theme to the fiscal. Timing may be
unfortunate for dollar bulls because this redirected focus may coincide with a slew of weaker U.S. hard data over the summer months as trade war consequences show up in economic releases,
they say in a note Thursday. Citi acknowledges the combination of a bear steepening in the U.S. Treasury curve -- when longer-term yields rise more steeply than the short end -- and swap
spreads moving more negative is risk-off for sentiment and could prompt a double crunch of lower equities and higher yields. A negative swap spread means the fixed rate on an interest-rate
swap is lower than the rate on a U.S. Treasury, a rare event given the "risk-free" perception of Treasurys.