U.S. dollar bullish bets climb as strong economy backs Fed rate outlook

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U.S. dollar bullish bets rise

Highlights

Bullish futures positions on the U.S. dollar surge to their highest in over a year, with the largest weekly rise since 2018, as CFTC data show renewed optimism in U.S. economic outperformance.
Stronger-than-expected U.S. data—172,000 jobs added in May and core inflation rising to 2.9 percent—shift market expectations from Fed rate cuts to a potential quarter-point hike by March 2025.
Relative dollar strength is bolstered by resilient U.S. equities, foreign inflows driven by the AI boom and SpaceX IPO, and diminished rate hike expectations in the Eurozone and UK due to higher energy exposure.

Investor positioning and policy expectations

As reported by Financial Times, bullish positions on the U.S. dollar in the futures market last week rise by the most since 2018 and reach their highest level in more than a year. Data from the Commodity Futures Trading Commission show the move, which JPMorgan analysts link to a renewed belief in U.S. exceptionalism.

The dollar has gained more than 2 per cent against a basket of peer currencies since the start of the war in Iran, as investors judge that the U.S. economy is better placed than Europe and Asia to withstand higher energy prices. Even after the signing of a truce between the U.S. and Iran, the currency weakens only slightly as market focus shifts back to domestic economic strength.

Investors have also reversed expectations for monetary policy since the start of the year. In January, futures traders were betting on two or three Fed rate cuts this year, but stronger-than-expected economic data have changed that view. The U.S. adds 172,000 jobs in May, more than double Wall Street expectations, while core inflation rises to 2.9 per cent in May from 2.8 per cent in April.

That backdrop leads traders to continue betting that the Fed's next move will probably be a rate rise, with markets currently pricing in a quarter-point increase in borrowing costs by March next year. The Fed is also expected to remove the easing bias from its guidance on Wednesday as it delivers its first interest rate decision under new chair Kevin Warsh.

Relative strength supports dollar demand

Market participants say support for the dollar now extends beyond geopolitical demand for safe assets. Steven Englander, global head of G10 foreign exchange research at Standard Chartered, says there is a positive dollar story beyond the Iran war and argues that concerns about the U.S. labour market have been overstated.

The resilience of U.S. equity markets is also helping to draw foreign capital back into dollar assets. Momentum from the AI boom and SpaceX's blockbuster IPO adds to the attraction of U.S. markets, contrasting with last year when Donald Trump's trade policies weakened confidence in the world's main reserve currency.

By comparison, expectations for rate increases have faded more quickly in the Eurozone and the UK, where economies are more exposed to imported energy costs and the Hormuz shock. Karl Schamotta, chief market strategist at Corpay Currency Research, says the European Central Bank and Bank of England are less likely to tighten aggressively into economic downturns, reinforcing the view that the U.S. will continue to outperform.

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