Bulls have been cutting their bets for six consecutive weeks. Has the US dollar's current rally peaked?

According to Zhitong Finance, despite the US dollar poised to record its best single-week gain since February this year, thanks to the Federal Reserve's different interest rate policy from its global counterparts, which is to maintain higher rates for a longer period, foreign exchange traders are betting that the US yield advantage will not continue. On Friday, the Commodity Futures Trading Commission (CFTC) will release the latest weekly data as of Tuesday, June 11th, revealing whether speculators continue to maintain this sentiment before the Fed policy meeting and key consumer inflation data are announced. Prior to early June, speculators significantly reduced their long positions on the US dollar for six consecutive weeks.

Federal Reserve officials hinted on Wednesday local time that there will only be one rate cut this year. Fed Chairman Powell said that the central bank needs to see sustained evidence that inflation is approaching the 2% target before starting to ease policy. Ahead of the Fed's latest rate decision announcement, the Consumer Price Index (CPI) released earlier on Wednesday was lower than expected, leading traders to increase bets on the Fed's earliest rate cut in September.

Even after market volatility, the US dollar has risen for the fourth consecutive week, the longest streak since February, just slightly below the year-to-date high. Recent rate cuts by the two major counterparts of the Federal Reserve - the European Central Bank and the Bank of Canada - provided further support.

Analysts at J.P. Morgan Asset Management wrote in their 2024 mid-year investment outlook that the US dollar will continue to benefit from the Fed delaying rate cuts compared to other central banks, but it "may have peaked." They wrote: "Our optimism about the US economy may have peaked, and pessimism about other regions of the world may have also peaked. Stable interest rate differentials and narrowing growth differentials may limit the dollar, keeping it strong for a longer period, but not stronger."

Non-commercial traders - including asset management companies, hedge funds, and other speculative market participants - have cut more than two-thirds of their long positions on the US dollar since the short-term peak in bullish sentiment in April. They currently hold about $10.6 billion in bets related to the strengthening of the US dollar, the lowest level since mid-March Scotiabank's foreign exchange strategist, Shaun Osborne, said, "The yield advantage of the US dollar has peaked, which should dampen optimism towards the US dollar. However, the market needs to gain confidence that the Federal Reserve is easing monetary policy."