Citi believes that the next sell-off of over 5% in the S&P 500 will serve as a key test for the dollar's safe-haven status, which will subsequently determine the dollar's medium-term direction.

According to news from the trading desk, Citi's global macro strategy team stated in a report on October 15 that the dollar's weakness this year can be attributed to two main themes: the reduction in U.S. stock allocations following the tariff impacts in the second quarter and the subsequent adjustments in hedge ratios. The core market debate centers around why the dollar did not exhibit safe-haven properties in April.

Currently, there are two theoretical explanations in the market: Viewpoint 1 posits that the simultaneous decline of the dollar and U.S. stocks in April was an anomaly caused by “self-harming” shocks, suggesting that the story of hedge ratios may have come to an end. Viewpoint 2, however, argues that extreme allocations by foreign capital towards U.S. stocks have led to a persistent positive correlation between U.S. stocks and the dollar, indicating that the increase in hedge ratios could continue.

Citi slightly favors the latter perspective, with analysts stating that the breakdown of the correlation between U.S. stocks and the dollar is not a one-time event but rather a result of foreign investors' extreme accumulation of U.S. stocks in recent years. This trend is likely to be further enhanced as the artificial intelligence bubble continues to draw global economic capital. The longer the correlation persists, the less beneficial dollar exposure becomes for foreign investors, thereby sustaining the motivation to further increase dollar hedge ratios.

The Citi team currently holds a slightly bearish outlook on the dollar while emphasizing three future catalysts that could boost the dollar:

1. The conclusion of the Lisa Cook Supreme Court case in January 2026, without her being ousted, and the approval of new FOMC members; 2. Recovery in the U.S. labor market; 3. The dollar's resurgence as a safe haven in times of risk aversion.

Analysts assert that a dollar reversal is unlikely until "the Fed's dovish stance peaks and U.S. cyclical weakness reaches its zenith." They anticipate that this turning point will occur within the next three months, at which point the dollar is expected to rebound in 2026.