Safe-haven demand returns and interest rate cut expectations reverse, traders turn bullish on dollar for first time this year

Bloomberg News has learned that the latest data shows traders have turned bullish on the U.S. dollar for the first time this year, as risk aversion and changing interest rate expectations are jointly driving this trend reversal.

According to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday, as of March 17, hedge funds, asset managers, and other speculative investors have accumulated approximately $6.2 billion in dollar long positions, reversing a persistent bearish stance on the dollar since mid-December last year. Previously, in mid-February, market bets against the dollar reached as high as about $22 billion.

This shift occurred within three weeks of the U.S. launching military actions against Iran. The escalation of the conflict has led to a continuous rise in international oil prices, fueling inflation expectations and strengthening the dollar. Data shows that since March, the dollar index has risen about 2%, potentially marking the largest monthly gain since July last year.

Analysts note that recent dollar movements are strongly correlated with oil price performance. On one hand, rising energy prices increase inflationary pressures, weakening expectations of Federal Reserve rate cuts; on the other hand, in the face of increased global market volatility, funds are flowing back into the dollar as a highly liquid safe-haven asset.

A strategist at BMO Asset Management said that during sudden shocks, investors tend to quickly reduce risk exposure, “which means unwinding dollar short positions,” and the dollar’s liquidity and safe-haven qualities further enhance its attractiveness.

Meanwhile, Wall Street institutions are also shifting their views. JPMorgan strategists recently turned bullish on the dollar for the first time in a year, noting that in an environment where both equities and bonds are under pressure, the dollar is the “most prominent defensive asset.”

Changes in market expectations are also reflected in interest rate paths. As oil prices rise and inflation risks intensify, the previously dominant narrative of “multiple rate cuts” has quickly unraveled. Latest pricing shows traders have fully priced out last year’s rate cut expectations and are even betting that the Federal Reserve may raise interest rates later this year, with the probability rising to about 50%.

Forex traders point out that the Iran conflict and soaring energy prices have caused a fundamental shock to market expectations, not only ending the rate cut cycle but also accelerating the unwinding of dollar short positions, pushing the dollar into a new upward cycle.