Hedge funds' bearish sentiment on the yen rises to highest since 2007, while dollar bullish bets hit a ten-year high.

The strength of the US dollar and the continued pressure on the yen are causing extreme positioning in the foreign exchange market.

On July 6, according to the latest data released by the U.S. Commodity Futures Trading Commission (CFTC), for the week ended June 30, leveraged traders held nearly 138k short yen contracts, the highest since 2007.

On June 30, the dollar-yen briefly rose above 162.80. The yen weakened to its lowest level since 1986, sparking widespread speculation as to whether Japanese authorities would intervene again.

Meanwhile, global traders' bullish bets on the dollar surged to nearly $138k, the highest since 2015. The dollar gained about 2% in June, one of its best monthly performances in nearly a year.

The dollar's strength was driven by Fed Chairman Walsh's pledge to restore price stability, combined with the safe-haven appeal of dollar assets amid geopolitical risks, which together supported the rally.

Yen short positions hit a 17-year high, intervention expectations rise

The yen is under dual pressure from fundamentals and positioning.

CFTC data shows that as of June 30, leveraged funds' short yen contracts rose to nearly 138k, the highest since 2007. The sharp accumulation of these positions is highly synchronized with the yen's continued depreciation.

Japanese Finance Minister Satsuki Katayama reiterated last week that authorities can take appropriate action in the currency market at any time. Data shows that from April 28 to May 27 this year, Japanese authorities used a total of about 11.73 trillion yen (approximately $72.7 billion) to defend the yen, setting a record.

The yen remains one of the worst-performing major currencies this year. Its core drag is the persistent interest rate differential between Japan and major economies such as the United States.

Although the Bank of Japan raised rates as expected in early June, which theoretically should have supported the yen, the hawkish signals from Fed Chairman Walsh quickly overshadowed this positive factor, further fueling bearish sentiment on the yen.

Dollar long bets at decade high, interest rate narrative dominates market

Behind the dollar's strength is a repricing of the Fed's policy path.

According to CFTC data, as of June 30, global traders' net long dollar positions expanded to nearly $40B, the highest in over a decade. The data covers combined holdings of asset managers, hedge funds, and currency speculators.

Currency traders' bullish sentiment aligns with the views of major Wall Street banks. Strategists at JPMorgan, Bank of America, Goldman Sachs, and other institutions have all expressed bullish views on the dollar.

Andrew Hazlett, a currency trader at Monex Inc., said:

The dollar's strength is mainly driven by the interest rate narrative.

Traders now broadly expect the Fed to raise rates at least once more this year. This stands in stark contrast to market expectations before the outbreak of the Iran war in late February, when the prevailing view was that the Fed would begin cutting rates in 2026.

The U.S. and Israel's military action against Iran disrupted key crude oil shipping routes, driving oil prices sharply higher, exacerbating inflation concerns, and putting global policymakers on high alert. As the world's largest oil producer, the U.S. and its currency benefit from the risk-off sentiment arising from this situation.

Jane Foley, head of currency strategy at Rabobank, said:

Fed rate hike expectations and the resilience of the U.S. economy are positive supports for the dollar. By contrast, the growth risks implied by the blockade of the Strait of Hormuz have a more pronounced impact on the euro zone and other regions.

Bearish voices remain, weak employment data provides support for bears

Although dollar long positions are at elevated levels, some strategists remain cautious about the sustainability of this rally.

These views argue that market expectations for aggressive Fed rate hikes have become somewhat excessive, and the dollar's upside momentum could soon be exhausted.

U.S. employment data released last week was significantly weaker than expected, with a sharp slowdown in nonfarm hiring in June, supporting the bearish dollar camp to some extent and dampening rate hike expectations.

Since the start of July, the dollar has pulled back slightly overall.

This divergence means that the dollar's short-term direction remains highly dependent on upcoming inflation and economic data, as well as the Fed's latest policy statements.

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