Dollar’s best streak since February threatened as bulls retreat

While the dollar is on track for its best run of weekly gains since February, helped by a Federal Reserve higher-for-longer interest-rate policy that diverges from global peers, currency traders are betting the US yield advantage won’t last.

On Friday, the Commodity Futures Trading Commission will report fresh data through Tuesday that will reveal whether speculators, who slashed long dollar bets for six straight weeks heading into early June, continued that sentiment ahead of the recent Fed policy meeting and a critical reading of consumer inflation. This report will cover the week through Tuesday, June 11.

Fed officials on Wednesday signaled just one interest-rate cut to come this year, and Chair Jerome Powell said the central bank needs to see continued evidence that inflation is moving closer to its 2% target before starting to ease policy. The announcement came after a softer-than-expected consumer price index report earlier in the day that led traders to ramp up bets on a cut as soon as September.

Even after the market jostling, the dollar remains on pace for its fourth consecutive week of gains, the longest stretch since February, and trades just shy of its year-to-date high. Recent first moves to cut rates from two of the Fed’s major peers – the European Central Bank and Bank of Canada – have offered further support.

The dollar will continue benefiting from the Fed delaying rate cuts relative to other central banks, but it “may be topping out,” analysts at JPMorgan Asset Management wrote in their 2024 mid-year investment outlook.

“We may have passed peak optimism about the US economy and peak pessimism about the rest of the world,” they wrote. “Stabilizing interest rate differentials and narrowing growth differentials may put a lid on the dollar, keeping it strong-but not stronger-for longer.”

Non-commercial traders – a group that includes asset managers, hedge funds and other speculative market players – have cut long dollar wagers by more than two-thirds since near-term peak bullishness in April. They now hold roughly $10.6 billion in bets tied to trades the greenback will rise, the least since mid-March.

“The dollar’s yield advantage has peaked,” which should weigh on sentiment for the currency, said Shaun Osborne, head of foreign-exchange strategy at Scotiabank. But “markets need to gain confidence that the Fed is easing.”