Global investors are flocking to the U.S. dollar, betting that the artificial intelligence boom will help the world’s largest economy perform strongly this year and force the Federal Reserve to keep interest rates high.
According to data from the Commodity Futures Trading Commission (CFTC), bullish bets on the dollar rose last week to their highest level since 2018, surpassing the peak seen over the past year. JPMorgan analysts attributed the increase to a renewed sense of confidence in “American exceptionalism.” Investors are returning to the dollar. Since the outbreak of the Iran war, the currency has gained more than 2% against a basket of major currencies, as investors believe the U.S. economy is better positioned than its rivals to withstand the impact of higher energy prices. Now, with the prospect of an end to the conflict emerging, the currency has only weakened slightly, and market attention has shifted to the strength of the U.S. economy. “Apart from the Iran war, the dollar has a ‘positive story’,” said Steven Englander, head of global G10 FX research at Standard Chartered. “The U.S. economy is in good shape, and concerns about the labor market are exaggerated.” The continued strength of U.S. equities, driven by SpaceX’s successful listing and the AI boom, has also prompted investors to return to the dollar — a sharp contrast to last year, when the Trump administration’s erratic trade policies undermined confidence in the de facto global reserve currency. Underpinning the bullish dollar sentiment is a remarkable shift in investor sentiment toward the U.S. economy this year. In January, futures traders were still betting that the Fed would be forced to cut rates two or three times this year as inflation and the labor market cooled. However, that weakness has not materialized. The U.S. added 172,000 jobs in May, far exceeding Wall Street expectations. Inflation has also ticked up, with core inflation, which excludes energy and food prices, rising to 2.9% in May from 2.8% in April. New Fed Chair Kevin Warsh is expected to remove the “easing” bias from the policy guidance when he announces his first interest rate decision on Wednesday. Market pricing also indicates that the Fed will raise rates by 25 basis points by March next year.In contrast, expectations of interest rate hikes in economies such as the Eurozone and the United Kingdom have faded more rapidly. Due to their heavy reliance on energy imports, these regions have been more severely affected by the situation in the Strait of Hormuz.
