As the Federal Reserve adheres to its policy guidance of maintaining high interest rates for a long time, the interest rate gap between the United States and other economies continues to be at a high level, pushing the dollar to its longest weekly gain since February, but foreign exchange traders are betting that the dollar's interest rate advantage will not last.
On Friday, the Commodity Futures Trading Commission (CFTC) will release its latest data through Tuesday, which will reveal whether speculators continue to be in this mood ahead of the Federal Reserve's policy meeting and the release of key CPI inflation data. Before entering the beginning of June, speculators had cut their long dollar bets sharply for six consecutive weeks.
Traders have been cutting bullish dollar bets
Federal Reserve officials hinted on Thursday that they would only cut interest rates once this year, with Fed Chairman Powell saying they needed to see evidence that inflation continued to approach the 2% target before they would begin easing policy. The weaker-than-expected CPI report earlier led traders to increase bets that the Fed would cut interest rates as early as September.
Even after the market turmoil, the Bloomberg Dollar Index remained on track for a fourth straight week of gains, its longest winning streak since February, and traded just below its year-to-date high after two major central banks, the European Central Bank and the Bank of Canada, cut interest rates ahead of the curve, lending further support to the dollar.
The dollar will continue to benefit from the prospect of the Federal Reserve cutting interest rates later than other central banks but "may be about to peak," analysts at JPMorgan Asset Management wrote in their mid-term 2024 investment outlook.
“We may have passed peak optimism about the U.S. economy and peak pessimism about the rest of the world,” they wrote. “Stable interest rate differentials and narrowing growth differentials are likely to keep a lid on the dollar’s appreciation, keeping it stronger but not more so.”
Non-commercial traders, which include asset managers, hedge funds and other speculative market players, have cut their long dollar bets by more than two-thirds since bullish sentiment reached a recent peak in April. They now hold about $10.6 billion in bullish dollar bets, the lowest since mid-March.
"The dollar's interest rate advantage has peaked," which should weigh on sentiment toward the greenback, said Shaun Osborne, head of foreign exchange strategy at Scotiabank. But the real blow would require "markets to gain confidence that the Fed is easing monetary policy."
The article is forwarded from: Jinshi Data