The US dollar experienced its second consecutive day of decline on Friday, falling 0.19% to 101.32 on the dollar index as easing inflation and falling oil prices tempered expectations for Federal Reserve rate hikes. However, despite these recent declines, the greenback remains up for the week and on pace for its strongest monthly percentage gain since July after hitting a 13-month high earlier in the week. According to The Economic Times, the dollar had kicked off the week with three straight days of gains, continuing an uptrend that began the prior week after a policy statement from the Fed, and first under new Chairman Kevin Warsh, was largely seen as hawkish by market participants. Thursday's data showing a key measure of US inflation met economists' expectations and easing oil prices, down about 4% on Friday, have moderated rate-hike bets slightly. Markets are still pricing in an increase in rates of roughly 25 basis points from the Fed this year, according to LSEG data.
Large currency speculators in the US dollar futures market have significantly increased their bullish positioning, with net long positions reaching 16-month highs following last week's FOMC meeting. According to the latest Commitment of Traders (COT) data, net-long exposure surged to $27 billion, marking the fastest weekly increase in over 7 years with an $11.4 billion increase in the US dollar futures market. The data reveals that non-commercial futures contracts of US dollar index futures, traded by large speculators and hedge funds, have reached levels not seen in nearly 16 months, with asset managers increasing their net-long exposure by 1.8k contracts to 18.4k, their most bullish level since January 2025. Latest data from the US Commodity Futures Trading Commission shows that speculators now hold their largest net bullish position on the dollar in 16 months, valued at nearly $30 billion, with the US Dollar Index standing near 101 points, close to its highest level in a year. The positioning data show traders increasingly backing a stronger US dollar while adding bearish exposure to commodity-linked currencies such as the Australian and Canadian dollars.
The Federal Reserve's hawkish shift has significantly boosted dollar strength, with Fed fund futures now pricing in a 25bp hike as soon as October and another potential hike in December. New Federal Reserve Chairman Kevin Warsh introduced a major revision to the monetary policy statement by removing language that had previously suggested a bias toward future interest rate cuts, signaling a more restrictive and cautious stance. Minneapolis Fed President Neel Kashkari said on Friday that the central bank may need to raise rates amid broad inflation, while Federal Reserve Bank of New York President John Williams said that while inflation pressures are likely to moderate this year, they remain too high, and pushed back his timeline for getting inflation back to the Fed's 2% target. The dramatic increase in speculative long positions indicates that large speculators and hedge funds are increasingly confident in the dollar's near-term prospects, with the substantial weekly increase in net positions highlighting the rapid acceleration in bullish sentiment following the Fed's hawkish stance. Market pricing for the Federal Reserve to keep rates unchanged at its July meeting fell from 91% to 72%, while expectations for a 25-basis-point rate increase rose from 9% to 28%.
The Japanese yen positioning has become increasingly crowded, with gross longs among large speculators and asset managers reaching fresh record highs. However, the pace of accumulation has slowed considerably, suggesting traders may be pushing their luck from a positioning perspective while also flirting with the threat of intervention. Against the Japanese yen, the dollar shed 0.02% to 161.74, with crossing the 161.96 mark would take the Japanese currency to its weakest level since 1986. For the week, the greenback is up 0.29% and poised for a second straight weekly advance. Data showed on Friday that core inflation in Tokyo accelerated in June, providing additional support for the yen. Japanese Finance Minister Satsuki Katayama said on Monday that authorities stand ready to respond appropriately to currency movements at any time. Analysts at Wells Fargo said the risk reward is to be tactically short the dollar against the yen heading into the U.S. jobs report next week, given intervention risks, as "authorities could capitalize on a weak or even a slightly soft U.S. payrolls print." They stressed this is a near-term play and still want to be long beyond early July.
Large speculators flipped to net-short exposure in Australian dollar futures for the first time since mid-January, with both large speculators and asset managers piling into bearish bets for a second consecutive week. The RBA delivered a less hawkish hold than some had expected, adding to the bearish sentiment. Large speculators increased short exposure by 18%, while asset managers increased theirs by 21%, this does little to derail the hunch that AUD/USD could fall towards 69 cents before the rally regains strength later in the year. The Aussie, down more than 1.8% for the week so far, was under pressure at $0.6890 ahead of May jobs data, where some reversal of April's weakness is expected. The New Zealand dollar, down 1.7% this week, sat at $0.5640, just above Wednesday's seven-month trough of $0.5631. Canadian dollar sentiment continues to deteriorate, with large speculators and asset managers increasing gross short exposure while trimming longs, reinforcing a bearish bias toward the loonie. The euro fell in European trading on Monday against a basket of global currencies, resuming losses that paused on Friday against the US dollar, moving back toward its lowest level in three months as investors continue to favor the US dollar. The euro fell 0.1% against the dollar to $1.1453, with the single currency losing 0.9% against the dollar last week, marking its second weekly decline in the past three weeks following the Federal Reserve's hawkish meeting.
U.S. crude dropped 3.6% to $69.33 a barrel and Brent fell to $72.02 per barrel, down 4.34% on the day, and were on track for weekly declines of nearly 10% as more oil tankers exited the Strait of Hormuz. This decline in oil prices, down about 4% on Friday, has moderated rate-hike expectations slightly. Sterling strengthened 0.09% to $1.3203 but was on track for a second straight weekly decline. The dollar index, which measures the greenback against a basket of currencies, fell 0.19% to 101.32 but was on track for a second straight weekly gain, with the euro up 0.18% at $1.1389. Since the start of May, 2-year U.S. Treasury yields are up 27 basis points to 4.15% against a 7 bp fall in Europe's benchmark German 2-year yields to 2.56%, while the gap in favor of U.S. yields widened 20 bps to top 150 bps at the 10-year tenor. Steve Englander, head of global G10 currency research at Standard Chartered, noted that "We believe the move in rates and the dollar reflects expectations of cyclical and structural U.S. economic outperformance. Strong productivity growth, partly AI-driven, should support higher earnings and lead to dollar-positive capital inflows."
