ORLANDO, Florida, May 22 (Reuters) - There are plenty of

fundamental economic reasons to hold a long term negative view

on the U.S. dollar, but the selling and bearish sentiment

currently smothering the greenback may be overdone.

The dollar has lost 5% of its value against a basket of

major currencies since President Donald Trump's tariff

'Liberation Day' on April 2, and has fallen 10% since

mid-January, when it was its strongest in more than two years.

The economic and policy uncertainty caused by Trump's trade

war and its chaotic implementation have dimmed the dollar's

allure, while Trump's drive to rip up the world economic order

of the last 80 years and his attacks on Federal Reserve Chair

Jerome Powell have also alarmed investors.

What's more, if the Trump administration is to revive U.S.

manufacturing, reduce the trade deficit and rebalance global

trade, a weaker exchange rate must be part of the plan.

Clarity around some of these issues may not come for a

while. The U.S.-China tariff truce expires on July 9 and Trump's

tax-cut bill may not be finally approved until the July 4

recess, by which time the debt ceiling issue will be coming on

investors' radar again.

This is the backdrop against which many investors are now

reassessing their exposure to dollar-denominated assets. That

includes Treasuries, especially longer maturity bonds, which are

feeling the heat from burning worries over Washington's debt and

deficits. With the world's reserve currency and reserve asset

under pressure, it's little wonder U.S. stocks are

under-performing most global peers this year too.

Added together, that's a powerful headwind for the dollar,

despite the recent tailwind from the U.S.-Sino trade detente.

But as is often the case in financial markets, traders and

investors may have gotten a bit ahead of themselves.

Bearish sentiment and positioning are now at extreme levels,

according to some measures.

TOO MUCH, TOO SOON

Bank of America's latest global fund manager survey showed

that exposure to the dollar this month was the lowest since May

2006, a 19-year low. A net 17% of investors in the survey are

now underweight the dollar.

The same survey also showed that a "U.S. dollar crash on

international buyers' strike" is now considered to be the third

biggest tail risk to world markets, according to investors, only

marginally behind inflation forcing the Fed to raise interest

rates.

The multi-year process of "de-dollarization" may be underway

but a buyers' strike is highly unlikely, even in these febrile

and uncertain times.

While "real money" investors like pension and insurance

funds, sovereign wealth funds and reserve managers may

reallocate capital over the course of several months,

speculators and hedge funds move much quicker. And further.

Commodity Futures Trading Commission data shows that hedge

funds are holding an overall short dollar position - effectively

a wager that the currency will weaken - worth $17 billion, one

of the biggest short positions in years. Moreover, as recently

as January funds held a net long position worth $35 billion,

their most bullish dollar bet in nine years.

Positioning in the yen is particularly extreme - bullish

bets on the Japanese currency have never been bigger. With calls

mounting for the Bank of Japan to pause its rate hikes and

resume bond buying to stabilize the long end of the curve, the

yen's upside from here may be limited.

Oddly, the dollar's lurch lower has gone against the latest,

hawkish shifts in Fed rate expectations. U.S. rates futures

markets are now barely pricing in two quarter-point rate cuts

this year, with the first not coming until October. Compare that

with four cuts starting in June that traders were anticipating

only a couple of months ago.

There are also signs that the dollar's tight and

well-established correlation with U.S.-euro zone yield spreads

has broken down in recent weeks. But history suggests that

correlation will re-establish itself pretty quickly.

The dollar and exchange rates will be a key topic of

discussion among finance ministers and central bank chiefs from

the Group of Seven nations meeting in Canada this week. They

will no doubt also feature in Washington's bilateral talks with

key trading partners, particularly in Asia, as trade deals are

thrashed out.

The dollar's longer term direction may be lower. In the near

term though, a pause or even correction may be warranted.

(The opinions expressed here are those of the author, a

columnist for Reuters)