One big Wall Street firm is calling for the end of dollar selling, at least for now

Citigroup strategists are temporarily pausing their bearish dollar view, moving to neutral short-term after the dollar's 11% decline, citing the euro's overextension and U.S. rate differentials, though they anticipate renewed bearishness post-September FOMC. Concurrently, Citi maintains its overweight stance on U.S. equities, upgraded in April, driven by the AI theme, and favors ex-China Asian emerging markets and European fiscal upside. They also stick to an underweight duration call due to inflation and fiscal deficits, but would reverse this if the Fed cuts rates, which they see as a 50/50 possibility in September.

Analysis

Strategists at Citigroup have made a notable tactical shift, moving from a bearish to a neutral short-term stance on the U.S. dollar following its 11% decline in 2025. This adjustment is predicated on the view that the euro's strength is now overextended, particularly given the U.S. holds a significant interest rate advantage of approximately 250 basis points over the E.U. Historical analysis of similar currency moves suggests a period of consolidation and marginal dollar strength is likely. However, Citi anticipates resuming its bearish dollar position after the September FOMC meeting, citing underlying pressures from capital flows and the U.S. balance of payments. Concurrently, the firm is maintaining its overweight recommendation on U.S. equities, a position initiated in early April, driven by the continued resurgence of the Artificial Intelligence theme. This pro-risk allocation extends globally, with a preference for ex-China Asian emerging markets like Korea and Taiwan, and an overweight on European equities funded by an underweight in the technology-light UK market. In fixed income, Citi remains underweight duration due to persistent inflation threats and expected heavy bond issuance, but notes this position is highly tactical and would be reversed quickly if the Federal Reserve begins cutting rates—an event they assign a 50/50 probability for September.

Key Decisions for Investors

• Investors with short U.S. dollar positions should consider tactically reducing exposure or hedging, as the currency may enter a consolidation phase due to overextended euro positioning and supportive U.S. rate differentials.
• Maintain or increase exposure to U.S. and AI-centric Asian equities, such as those in Korea and Taiwan, as the firm believes the technology-driven rally will persist despite broader market concerns.
• Remain cautious on long-duration government bonds due to inflation and supply headwinds, but prepare for a rapid pivot to a long-duration stance if the Federal Reserve signals a definitive start to its easing cycle, with the September FOMC meeting being a key catalyst to monitor.