• Dollar positioning reached its most negative level in over 14 years in February 2026, with short bets at their highest since January 2012.
  • Fund managers' dollar exposure dropped below prior lows amid deteriorating U.S. labor market concerns and Federal Reserve policy uncertainty.
  • Analysts project ongoing USD weakness into 2026, with the euro expected to strengthen to 1.22 against the dollar by year-end.

Investor sentiment toward the U.S. dollar has turned decisively bearish, with positioning hitting a 14-year extreme in February 2026, according to Bank of America (BAC)'s latest FX and rates survey. Short bets against the dollar are now at their highest since January 2012, the earliest data point available, reflecting record pessimism as fund managers' exposure plummeted below last April's lows.

Efforts to stabilize the dollar have hit a snag, despite recent political developments. Concerns about the Federal Reserve's independence eased after President Donald Trump nominated Kevin Warsh as Fed Chair, replacing Jerome Powell in May, but this failed to lift dollar demand or improve sentiment toward U.S. assets, according to people familiar with the matter. Market participants cite further deterioration in the U.S. labor market as a key downside risk, contradicting some recent data showing consumer spending resilience at 2.6% year-over-year in January, the strongest in nearly two years.

"What we're seeing is a structural shift away from the dollar," said one anonymous fund manager, who requested not to be named due to the sensitivity of the topic. "Without a turnaround in labor data or clearer Fed guidance, this sell-off could persist." Attempts to reach Bank of America for additional comment were unsuccessful.

Bank of America maintains a bullish outlook on the euro, forecasting EUR/USD at 1.22 by the end of 2026, with most dollar weakness expected post-Q1 due to gradual catalysts like lower U.S. interest rates and European Central Bank cuts. ING analysts note eroding dollar appetite amid global growth optimism and Fed policy uncertainty ahead of the U.S. midterm elections, favoring pro-cyclical currencies like the euro and commodity bloc FX. Emerging markets, such as the Chinese yuan nearing a range low of 6.85 against the dollar, are outperforming in this environment.

Short-term, the dollar appears undervalued with upside risks from upcoming U.S. CPI data, expected at 0.3% month-over-month and 2.5% year-over-year, which could support hawkish Fed repricing. However, rallies are likely to be sold, as options markets show strong demand for dollar puts. Long-term, structural weakness is anticipated, with BofA also projecting GBP/USD at 1.45 by end-2026. Historical parallels exist to January 2012, when short bets peaked similarly, but current levels exceed last April's lows amid recurring Fed independence worries under the Trump administration.

Stakeholders like fund managers face heightened volatility, while global investors shift to emerging markets and procyclical FX. This bearish positioning signals reduced confidence in U.S. assets, potentially raising import costs for consumers and pressuring exporters, though resilient consumer spending offers some offset. Broader outlooks note U.S. growth continuity but highlight policy and geopolitical risks, such as Trump's Greenland tariff threats, which have spurred a 'sell-America' trade and alienated allies, amplifying FX selling bias.

Correction: An earlier version of this article misstated the timing of consumer spending data; it was for January 2026, not December 2025.