We are re-establishing a long position in EUR/USD based on the view that the current USD strength is likely short-term and fragile, underpinned by rising US yields and near-term fiscal concerns. However, as legal and political uncertainty surrounding potential Trump-era tariff policies intensifies—particularly with the possible revival of Section 338—the broader risk environment could deteriorate rapidly, undermining confidence in the USD.

While elevated US yields and market expectations for larger deficits are currently supporting the dollar, this strength is increasingly tethered to a volatile mix of fiscal instability, legal ambiguity, and political brinkmanship. If markets begin to price in the systemic risks of aggressive tariff strategies, judicial conflict, or reckless mortgage policy reform (e.g., Fannie/Freddie reprivatization), capital could begin rotating out of USD in favor of more politically stable alternatives.

The euro stands to benefit in such a scenario, not necessarily due to domestic eurozone strength, but because it offers a cleaner hedge against a disorderly US policy trajectory. Moreover, while the ECB remains cautious, it is not facing the same level of fiscal stress or political tail risk as the US. As global investors seek safer exposure in G10 FX, EUR/USD offers asymmetric upside should sentiment swing against the dollar.

In sum, the current USD rally is built on shaky ground, and EUR/USD could turn higher as risk aversion intensifies and the market begins to question the sustainability of US exceptionalism under escalating legal and fiscal stress.

LONG EURUSD

May 30 2025