The Bloomberg Dollar Spot Index has experienced its eighth consecutive daily increase, marking the longest rally since April 2022. This surge follows unexpectedly robust U.S. employment data, which has led the market to dismiss the likelihood of a 50 basis point rate cut by the Federal Reserve this year. Consequently, the dollar has reached its highest level since mid-August.
The resilience of the U.S. economy, highlighted by recent surprising data, has forced traders to recalibrate their expectations for lenient monetary policy in the U.S. This reduces the necessity for the Fed to implement significant rate cuts in response to easing inflation.
Erik Wytenus, the EMEA Investment Strategy Head at J.P. Morgan Private Bank, noted that the term "resilience" aptly describes the U.S. economic health, which in turn boosts investor preference for U.S. assets.
Year-to-date, the dollar has strengthened against all G10 currencies, excluding the British pound. In early trading, the dollar appreciated against both the pound and the euro, contributing to a nearly 2% rise in the dollar index over the past eight days.
Two European-based traders reported increased corporate demand for dollars against the pound and hedge funds boosting long positions in dollar-yen trades. Due to confidentiality, they requested anonymity.
Since the release of the U.S. jobs report last week, bearish euro options have gained traction. Market sentiment is currently more favorable toward the dollar than it has been in over three months, particularly with the upcoming U.S. elections. Over the past 11 trading days, the premium for purchasing dollar call options has risen for 10 days compared to major currencies.
Neil Jones, Managing Director at TJM Europe, mentioned a gradual reduction in dollar short positions, noting that long-term investors from Asia and the Middle East are shedding euros and pounds, reflecting a decreased bullish sentiment towards these currencies.
