Hedge funds’ bearish sentiment on the yen has surged to its highest level since 2007, while bullish bets on the dollar have reached a ten-year high.

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The strong dollar and continued pressure on the yen are triggering extreme positions in the foreign exchange market.

On July 6, according to the latest data released by the U.S. Commodity Futures Trading Commission (CFTC), as of the week ending June 30, leveraged traders held nearly 138,000 short contracts on the yen, the highest since 2007.

On June 30, the USD/JPY once broke above 162.80. The yen depreciated to its lowest level since 1986, sparking widespread speculation about whether Japanese authorities will intervene again.

Meanwhile, global traders' bullish bets on the dollar have climbed to nearly $40 billion, the highest since 2015. The dollar rose about 2% in June, marking one of its best single-month performances in nearly a year.

The dollar's strength is driven by Fed Chair Powell's vow to restore price stability, combined with the dollar's safe haven appeal amid geopolitical risks, jointly supporting this round of gains.

Yen short positions hit highest level in more than seventeen years, intervention expectations rise

The yen is under dual pressure from fundamentals and positioning.

CFTC data shows that as of June 30, leveraged funds held nearly 138,000 bearish contracts on the yen, the highest since 2007. This sharp build-up in positions is closely synchronized with the continued weakening of the yen.

Japan’s Finance Minister Satsuki Katayama reaffirmed last week that authorities can take appropriate action in the forex market at any time. Data shows that from April 28 to May 27 this year, Japanese authorities have used about ¥11.73 trillion (approximately $72.7 billion) to defend the yen’s exchange rate, setting a new record.

The yen remains one of the worst performing major currencies this year. The core drag factor is the persistent interest rate differential between Japan and major economies such as the U.S.

Although the Bank of Japan delivered a rate hike as expected in early June—which theoretically should support the yen—this positive was quickly overshadowed by hawkish signals from Fed Chair Powell, further heating up bearish sentiment on the yen.

Dollar bullish bets hit ten-year high, rates narrative dominates the market

Underlying the dollar's strength is the market's repricing of the Fed's policy path.

According to CFTC data, as of June 30, global traders' net long dollar positions expanded to nearly $40 billion, the highest in over ten years. This data includes holdings by asset management institutions, hedge funds, and currency speculators.

Forex traders’ bullish sentiment aligns with the assessments of major Wall Street banks. Strategists at JPMorgan, Bank of America, and Goldman Sachs have all published bullish views on the dollar.

Andrew Hazlett, FX trader at Monex Inc., said:

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

Currently, traders generally expect the Fed to raise rates at least one more time this year. This stands in sharp contrast to market expectations before the outbreak of the Iran war in late February, when the mainstream view was that the Fed would start cutting rates in 2026.

Military actions by the U.S. and Israel against Iran disrupted key oil shipping routes, causing oil prices to soar, fueling inflation worries, and putting policymakers on high alert worldwide. As the world's largest oil producer, the U.S. and its currency have benefited from the safe haven sentiment brought by this situation.

Jane Foley, Head of FX Strategy at Rabobank, said:

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

Bearish voices remain, weak jobs data supports shorts

Although long dollar positions are at a high level, some strategists remain cautious about the sustainability of this round of gains.

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

The U.S. jobs data released last week was significantly weaker than expected, with June non-farm hiring slowing sharply, partially supporting bearish views on the dollar and lowering rate hike expectations.

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

This divergence means the dollar’s near-term direction still highly depends on upcoming inflation and economic data, as well as the Fed’s latest policy statements.

Risk disclosure and disclaimerThe market carries risk, investment should be cautious. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial situation or needs. Users should consider whether any opinions, views or conclusions in this article are appropriate for their particular situation. Investments made accordingly are at your own risk. ```