According to CFTC data, funds have been increasing their net short positions in the US dollar for six consecutive weeks. Goldman Sachs predicts that the US dollar will become stronger in the future.
Before stronger-than-expected US employment data pushed the dollar to a one-month high, asset management firms chose to increase their bets on a dollar drop, which may result in heavy losses.
Data from the US Commodity Futures Trading Commission (CFTC) showed that funds increased their net short positions on the US dollar for the sixth consecutive week, the longest since 2022. A government report last Friday showed that US employment growth in May exceeded all economists' expectations, causing market panic and causing traders to delay their expectations of when the Fed will cut interest rates.
Goldman Sachs strategist Kamakshya Trivedi wrote in a report that in this week's Fed policy decision, a flexible US labor market "should help set a firmer tone for the dollar." Against the backdrop of upcoming election uncertainty and strong asset returns, "we still believe that the dollar will prove to be the 'safest haven' for portfolio flows in the coming months."
The US dollar rose against all 10 Group of Ten currencies on Friday last week, with the Bloomberg Dollar Index recording its largest single-day gain since January. On Thursday, when Fed policy makers updated their interest rate forecasts for the first time in three months, the determination of dollar bears may be tested again.
According to the median estimate of foreign media surveys, 41% of economists predict that the Fed will signal in its closely watched "dot plot" that it will cut interest rates only twice this year, the same as the proportion that expects a decrease once or not at all.
In addition, traders are preparing for greater volatility brought by two major macroeconomic catalysts, regardless of whether they rise again or fall sharply: US May CPI data and Fed interest rate decisions.
Currently, the Bloomberg Dollar Index's volatility for the week is at its highest level this year, with a risk reversal premium for dollar call options of over 0.4%, reaching the highest level in a month, partly due to the turmoil of the Mexican peso.
On Monday morning, the dollar continued to rise, and the Bloomberg spot dollar index rose for the third consecutive day. Kathleen Brooks, XTB's research director, wrote in a report:
"Due to a strong labor market, they (Fed officials) may completely rule out the possibility of interest rate cuts this year, which may trigger a surge in US bond yields, widespread strengthening of the dollar, and weakness in the stock market."
Edited by Jeffrey