In a contrarian stance, foreign exchange strategists from Morgan Stanley, Crédit Agricole, and TD Securities are challenging the prevailing market consensus that the US dollar will continue to strengthen.
The Bloomberg Dollar Spot Index surged 2% in June, marking its largest monthly gain since the onset of the Iran war, and extended its advance at the start of July. Expectations that the Federal Reserve will maintain high interest rates or even implement further hikes have been the core driver of this rally. This was underscored by new Fed Chair Kevin Warsh's emphasis on the central bank's commitment to combating inflation during a June 17 press conference.
The momentum behind the dollar's rise has been so forceful that speculative traders have built their most extreme bullish positioning on the currency in a year and a half. Against this backdrop, a growing number of forecasters, including Eurizon SLJ Capital led by Stephen Jen, are beginning to argue that the potential gains for investors betting on further dollar appreciation are largely exhausted.
Valentin Marinov, Head of G10 FX Research & Strategy at Crédit Agricole, noted, "The dollar looks overbought and overvalued now. The Fed's hawkish stance may not be as aggressive as the US rates market is anticipating."
Potential Stalling of Dollar Rally
A pause or slowdown in the dollar's ascent would have significant implications for officials worldwide, including in Japan, as it would lessen the risk of imported inflation. This week, the yen hit a fresh 40-year low against the broadly stronger dollar, heightening the risk of intervention by Japanese authorities.
The next test for Fed policy expectations arrives on Thursday with the release of US employment data. The report is forecast to show the economy added around 115,000 jobs last month alongside rising wages—a reading robust enough to keep market bets on Fed rate hikes intact. Ahead of the data, traders are pricing in a 25-basis-point increase in borrowing costs by the Fed as soon as October, even hedging against the risk of action this month.
This stands in stark contrast to the period just before the war in late February, when traders were still expecting Fed rate cuts in 2026. Soaring oil prices and inflation expectations shattered those dovish bets. Combined with the resilience of the US economy in recent months, this laid the groundwork for the dollar's advance.
Wall Street's Bullish Dollar Consensus
This environment explains why much of Wall Street remains optimistic about the world's primary reserve currency. JPMorgan Chase, Bank of America Securities, and Goldman Sachs Group all advocate for further dollar strength. HSBC Holdings has suggested the currency's sharp rally could become one of the biggest "pain trades" in the second half of the year.
Carol Kong, a strategist at Commonwealth Bank of Australia, stated, "As the US economy continues to outperform its peers, the interest rate differential is expected to move further in the dollar's favor. We still expect the Fed to raise the federal funds rate more than what is currently priced by the market."
Market observers point to another supportive factor: massive investment in AI infrastructure, which is boosting corporate earnings and attracting international capital flows into US equities.
The Contrarian Argument
The skeptical group is not necessarily predicting an imminent collapse of the dollar's narrative. They simply argue that most of the positive news is already reflected in the currency's exchange rate, especially with the Fed expected to potentially stay on hold in the coming months. Natixis falls into this camp, as does Morgan Stanley, which stated last week it was "reluctant to 'chase' the dollar higher."
On Wednesday, Chair Warsh, speaking at a central banking forum in Portugal, noted that inflation risks had diminished in recent weeks while reiterating the Fed's resolve to return inflation to its 2% target.
Stephen Jen and his colleague Joanna Freire at Eurizon SLJ Capital wrote this week, "The market's shift in Fed policy expectations may have gone too far: we do not believe the Fed will hike in this cycle. A repricing of a more dovish Fed could help temper the dollar's appreciation."
Another key consideration, of course, is the economic landscape outside the US. Some strategists maintain that after months of geopolitical turmoil fueling safe-haven dollar buying, the relative interest rate advantage is poised to shift in favor of the dollar's rival currencies. For instance, the European Central Bank raised rates by 25 basis points last month, and the market sees a possibility of another hike before December.
A team of strategists at TD Securities led by Jayati Bharadwaj wrote, "The downtrend for the dollar should reassert itself later this year as global growth stabilizes, risk premia fade, and central banks elsewhere close the rate gap in the face of a Fed on hold."
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