Synopsis:

Bank of America Global Research highlights that the USD has significantly underperformed following April’s “Liberation Day” tariffs, diverging from typical crisis behavior. Despite elevated valuations and prior long positioning, the dollar failed to act as a haven, contrasting with past turmoil episodes.

Key Points:

• Unusual dollar behavior: Unlike prior shocks, the USD depreciated into and after the VIX spike triggered by "Liberation Day," while equities and Treasuries have since normalized.

• Historical divergence: In comparable past events, the trade-weighted USD either appreciated or remained supported in the 4 weeks post-peak turmoil. Post-"LD," the dollar fell the most of any comparable period.

• Positioning and valuation: The USD was overvalued and investors were net-long entering April, making it particularly sensitive to U.S.-centric shocks.

• Long-term reserve status: While some speculate on de-dollarization, any displacement of USD as global reserve currency remains a decades-long process—contingent on trust in alternatives.

• EUR outlook: BofA remains fundamentally bearish on the USD and sees the euro as well-positioned to gain prominence, especially as Europe pursues structural reforms and fiscal expansion.

Conclusion:

The USD's failure to rally during recent global risk aversion signals a shift in its crisis-response profile, due to valuation excesses and domestic policy uncertainty. While its global role remains intact, BofA sees ongoing downside risk for the dollar, with the EUR gaining favor as a credible alternative.