The US dollar weakened near a one-month low on Thursday, with the dollar index hovering near its lowest level since June 18 at 100.47, falling 0.8% over the previous two sessions and on track for a weekly decline. The greenback slipped against the Japanese yen for the third trading session, by 0.1% to 162.075 yen, while the euro was 0.1% higher at $1.1472, its strongest in a month. The sterling held near a two-month high at $1.354 on market expectations that Britain's incoming prime minister will pick a fiscally conservative finance minister. The Australian and New Zealand dollars were both down about 0.1%, at $0.6995 and $0.5842 respectively. As per The Economic Times, the dollar's weakness appears to be a correction from previous highs as markets had aggressively priced in a July rate hike that now looks overblown given cooling inflation.
The US consumer inflation slowed to 3.5% year-over-year in June, down from previous levels, with US producer prices unexpectedly falling in June in their biggest decline in 14 months, adding to evidence that inflation was easing before the latest flare-up in Middle East hostilities. This data, together with surprisingly soft consumer inflation and a slowdown in job growth in June, effectively rules out a Fed interest rate increase this month. The chances for a hike in July were slashed to 11%, versus a 45% implied probability at the start of the week, according to Fed funds futures prices via CME Group. Bosco Wu, investment strategist at Bank of East Asia, noted that the recent dollar weakness appears to be a correction from previous highs, as markets had aggressively priced in a July rate hike that now looks somewhat overblown given that inflation is cooling fast. However, the tightening trajectory remains intact as one month of cooling data is unlikely to signal sustained inflation slowdown.
Large currency speculators in the US dollar futures market have achieved a significant milestone, with aggregate net-long exposure climbing to a 10-year high of $39.8 billion according to the latest CFTC Commitment of Traders (COT) data. This positioning level represents a substantial increase from the previous period and marks the highest level since 2015. Asset managers increased their net-long US dollar exposure to 16,600 contracts, demonstrating sustained institutional confidence in the greenback's trajectory, though bullish exposure among large speculators has plateaued at around 13,000 contracts. The latest COT report reveals a market increasingly positioned for USD strength, with analysts noting that net-long exposure to the US Dollar Index is nearing its 2025 high among asset managers, suggesting potential for further gains toward the 101.50–102.00 target. According to Commodity Futures Trading Commission data for the week ended July 7, speculative traders are now the most bullish on the greenback since 2015 and hold more than $40 billion in long dollar derivatives positions, reflecting widespread institutional confidence in the dollar's outlook.
Oil prices rose for a fourth consecutive day on Thursday, with Brent crude futures last trading near a one-month high at $85.28 a barrel, as escalation in Middle East hostilities added upside risk to the inflation outlook. The U.S. struck Iran's coastal defences and missile sites on Wednesday after re-imposing a naval blockade of its ports, while Iran threatened to shut off more regional energy exports, saying it was engaged in an "existential war" with America. The tightening trajectory is intact as the flare-up in the Middle East should limit downside for the greenback, according to Bank of East Asia's Wu. Despite the dollar's decline, CBA economists noted that one month of softer-than-expected CPI data will not close the door to interest rate hikes, with markets closely watching producer price data due later. The optimism was somewhat overshadowed by elevated oil prices from the latest escalation in Gulf hostilities, with Trump reimposing a naval blockade of all Iranian ports and the U.S. military beginning fresh strikes in the Strait of Hormuz.
Despite the continued USD strength, analysts are warning of potential sentiment extremes across multiple currency pairs. The Canadian dollar futures market is signalling a potential sentiment extreme, with gross short positions among asset managers nearing a record high at 205k contracts, while net-short exposure among large speculators is also close to a record high at -17.0k contracts. The New Zealand dollar may be at risk of a sentiment extreme, with net-short exposure reaching another record high of -65.2k contracts among large speculators and net-short exposure among asset managers climbing to its highest level since November. However, analysts told Reuters that the dollar's longer-term direction will continue to depend heavily on the strength of the U.S. economy and sustained investor confidence in America's AI-led investment boom, which remains a major attraction for global capital. The changing relationship between the dollar and U.S. equities has also reduced the urgency to hedge, with the dollar having re-established its haven status during recent risk-off periods following the U.S.-Iran conflict.
