"American exceptionalism" trade makes a strong comeback: Dollar long positions see largest increase in six years

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Global funds are rushing back into dollar assets. The "America exceptionalism" trade is making a strong comeback amid multiple favorable factors, completely overturning the pessimistic expectations seen in the market at the beginning of the year.

The latest data from the U.S. Commodity Futures Trading Commission (CFTC) shows that long positions in dollar futures recorded the largest increase since 2018, rising to the highest level in more than a year. This dramatic shift in capital flows signifies investors' renewed strong belief in the U.S. economy's superior performance compared to global peers.

Although the signing of the U.S.-Iran ceasefire agreement has eased the geopolitical risk premium in the Strait of Hormuz, the dollar has seen only a slight pullback. The market focus quickly shifted from risk aversion to the strong fundamentals of the U.S. economy, hawkish expectations for the new Federal Reserve chair, and the booming tech and capital markets.

This trend means the market consensus at the start of the year betting on Fed rate cuts has been completely overturned. Faced with high returns on U.S. assets, global investors are choosing to ignore some policy uncertainties and continue to pursue risk-adjusted returns on dollar assets.

Long positions surge, rate-cut expectations shattered

The spike in CFTC data intuitively reflects a fundamental reversal in foreign exchange market pricing logic.

JPMorgan analysts attribute the surge in long positions to investors' renewed bets on "America exceptionalism"—namely, that the prosperity brought by artificial intelligence (AI) will help the world's largest economy continue to lead this year, forcing the Fed to maintain high interest rates.

At the start of the year, futures traders widely bet that as inflation and the labor market cooled, the Fed would be forced to cut rates two or three times in 2024. But this soft outlook has not materialized. As funds flood into dollar long positions, market sentiment has shifted completely from defensive rate cut trades to aggressive strong dollar trades.

Ceasefire can't mask hawkish tone, rate hike pricing fully incorporated

The easing in geopolitical risk hasn't weakened the dollar's strength. Since the outbreak of U.S.-Iran conflict, the dollar has risen over 2% against a basket of currencies, as the market expects the U.S. economy to be more resilient to energy price shocks than its European and Asian counterparts. Recently, the U.S. and Iran signed a ceasefire, ending conflicts in the Strait of Hormuz, but the ceasefire news only caused a slight dip in the dollar, highlighting strong fundamental support.

Consistently stronger-than-expected macro data has reshaped the Fed's policy trajectory. In May, U.S. nonfarm payrolls increased by 172,000, far exceeding Wall Street's expectations. The data for the previous two months were revised up by a total of 93,000, and the unemployment rate held at a low 4.3%. Combined with rising core inflation, the market not only abandoned hopes for rate cuts, traders also fully priced in Fed rate hike expectations for the year, putting pressure on U.S. bonds and pushing up the dollar.

Moreover, the market expects the new Fed Chair, Walsh, to eliminate the "dovish" policy guidance in his first decision, further solidifying the dollar's interest rate advantage.

AI boom and SpaceX IPO spark foreign capital "siphoning"

The prosperity of U.S. capital markets provides another strong support for the dollar. SpaceX's successful IPO and the ongoing AI boom have greatly boosted U.S. stocks, creating a powerful "siphoning" effect for capital, attracting large amounts of foreign investments and converting them into actual demand for dollars.

Steven Englander, Global Head of G10 FX Research at Standard Chartered Bank, points out that aside from geopolitical factors, the U.S. economy's performance is solid, and previous concerns about the labor market have proven exaggerated.

He emphasizes that although foreign investors may have some complaints about certain U.S. policies or administration, in the face of highly attractive risk-adjusted returns, capital continues to "vote with its feet." This stands in sharp contrast to last year's situation, when Trump's unpredictable trade policies undermined confidence in the dollar, and underscores the capital market's long-term recognition of the earning power of U.S. core assets.

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