Synopsis:

Société Générale draws a parallel between the current dollar retreat and past episodes of excessive USD strength—particularly the 1980s peak—warning that while the USD may rebound again in the near term, its structural vulnerabilities and extreme positioning could trigger a more profound decline if sentiment shifts further.

Key Points:

• Summer 2024 déjà vu?

  • The dollar saw a similar scare last summer, when Japanese investors briefly retreated from Treasuries, prompting fears about slowing growth and inadequate Fed easing.

  • That scare passed as US data rebounded and Japanese flows returned, reinforcing the idea that the US remains the default destination for excess global savings.

• Current pullback may be another temporary blip…

  • SocGen notes the possibility that the current dollar decline is just another correction, not a structural reversal, as foreign appetite for US assets remains strong.

  • But they emphasize that global positioning remains heavily skewed toward USD assets, and the real effective USD is still at levels last seen in the mid-1980s.

• The 1980s comparison offers a cautionary tale:

  • Despite strong US growth in 1985-1986, the USD lost over 20% by end-1986, and nearly 40% by end-1987, from its 1985 peak.

  • That decline was not purely cyclical, but catalyzed by a shift in fiscal policy, central bank pressure, and the Plaza Accord—suggesting that even without a recession, structural and policy factors can tip the USD lower.

• USD still looks overstretched historically:

  • Compared to past dollar peaks, the current retracement is minor, especially given rising US debt, widening fiscal and trade imbalances, and increasing global diversification away from USD holdings.

Conclusion:

SocGen warns that while the dollar could stabilize or rebound in the near term, history offers a clear warning. Structural imbalances, policy shifts, and extreme positioning have preceded major dollar downturns before. If global investors begin to question the sustainability of the US’s economic and policy path, a deeper dollar correction could lie ahead—perhaps this time more than just a moment.