The US dollar makes a strong comeback? Hedge funds continue buying as institutions proclaim: The "explosive rally" of 2022 may be repeated!

The long-silent US dollar bulls are quietly regrouping.

Hedge funds have been buying dollars over the past two weeks to counter major G10 currencies. According to Chase Trend Trading Desk, HSBC multi-asset strategist Duncan Toms directly listed "explosive dollar rally" as a core "pain trade" for the second half of the year in his latest research—the so-called pain trade refers to market moves that most participants are not prepared for, which will catch the majority off guard once they occur. They even invoked the playbook from 2022: that year, the dollar index rose by more than 15%, sweeping almost all asset classes.

This is not an isolated viewpoint from one institution. Deutsche Bank, J.P. Morgan, and HSBC have all pointed in the same direction at the same time: the wind is turning for the dollar.

Capital flows have moved first

Deutsche Bank's CORAX system tracks global electronic spot forex trading flows, with data up to June 26.

Data shows that hedge funds have persistently bought dollars against G10 currencies over the past two weeks. Overall, hedge funds remain net buyers of the dollar; the G10 buy reading is +0.9%, and for emerging markets it's even higher at +3.7%. Currently, these numbers are at the 99th percentile of the past five years—meaning hedge funds are currently long dollars (against EM currencies) at an intensity higher than 99% of the past five years.

On the other hand, real money (asset management institutions) are the opposite—they are still selling dollars, but the selling intensity has clearly eased from last week.

This divergence itself is a signal. Hedge funds are typically the frontrunners in directional bets, while the slowing sell-off by real money means the force suppressing the dollar is fading.

HSBC's verdict: Not just up, "explosive rise"

A typical dollar rally is digestible for markets. But HSBC’s wording is obviously heavier—"explosive".

In the report titled "The Biggest Pain Trade", the bank listed "explosive dollar surge" as one of the six major "pain trades" for the second half. The framework notes the first trigger for dollar strength is the Fed’s stance. After the June FOMC meeting, the Fed abandoned forward guidance and instead focused explicitly on controlling inflation, interpreted by markets as a hawkish shift. Front-end US Treasury yields climbed, giving the dollar a yield-support.

But what triggers an "explosive" rally? The bank gives two pathways:

Path one: The Fed is more aggressive than markets expect. If economic data remains strong—jobs market stays hot, inflation doesn't cool—the Fed may raise rates earlier and harder than markets expect. Once the market rapidly reprices the rate hike path, tightening financial conditions, the dollar may surge sharply in the short term.

Path two: Geopolitical tensions escalate again. Currently, the correlation between the dollar and oil has weakened—Strait of Hormuz reopening led to falling oil prices, yet the dollar strengthened. But if Middle East tensions intensify again and oil prices spike, the logic of safe-haven flows rallying the dollar will restart. If these factors combine, the dollar could see a one-sided trend like 2022.

In 2022, the dollar rally was triggered by: the Russia-Ukraine conflict + Fed’s aggressive rate hikes. DXY surged from just above 100 to 114, a 20-year high. HSBC believes the current dollar, relative to the Russia-Ukraine wartime period, is still notably weaker—upside has yet to be released.

J.P. Morgan: Dollar is "cheap", rate hike cycles necessarily bring trend appreciation

J.P. Morgan also leans toward a strong dollar view, but their scenario is milder—the base case is a moderate 3% appreciation in the dollar index, not an explosive surge.

Their core logic has three points:

First, hawkish pivot by the Fed. New Fed Chair Walsh's first appearance was hawkish, opening up right tail risk in the rate distribution, adding extra support to the dollar. The Fed is expected to stay put for all of 2026, keeping the target rate range at 3.5%-3.75%, but rates are expected to rise again in Q3 2027.

Second, dollar undervaluation. From both a rate model and cyclical model view, the dollar remains cheap relative to its rate differentials; fundamentals are not fully reflected. Historical data shows that from about 6 months before the first Fed hike to about 1 month after, the broad dollar index reliably appreciates about 5%. The base forecast is a 3% broad dollar rise, but history shows rate hike cycles typically coincide with trend dollar strength.

Third, structural weakness in the euro. The euro is a low-yield currency and has energy dependence issues; in Fed rate hike cycles, it has depreciated an average 27% (in three of the last four rate hike cycles). The bank lowered its EUR/USD target from 1.13 to 1.10, maintained its USD/JPY target at 164.

To understand this round of dollar strength, you must understand the macro backdrop.

At the start of 2026, markets expected two Fed cuts in the year. But the Middle East conflict and real Hormuz Strait closure-driven oil price shocks raised US inflation expectations. The Fed pivoted accordingly, with market expectations for hikes by the end of 2026 up to about 40bps—an absolute reversal in direction.

HSBC data shows consensus inflation forecasts for 2026 have been raised by about 90bps to 3.5% since the start of the US-Iran war. J.P. Morgan expects core PCE inflation to remain at 3.4% (YoY) in Q4 2026.

This "high inflation + resilient labor market" combo is the classic soil for dollar strength.

But reversal forces cannot be ignored

Commodities are a variable. J.P. Morgan forecasts Brent crude’s Q3 average at $86/barrel, falling to $78 by year-end. Falling oil prices will suppress inflation, cool rate hike expectations, and weaken some support for the dollar.

Additionally, real money (mutual funds, pensions, long-term capital) is still steadily reducing dollar holdings—G10 reading is -2.4%, completely opposite to hedge funds. Historically, when these two types of capital diverge for long, eventually one side gives in. It's still unclear who will turn first.

HSBC also clearly acknowledges this is a "pain trade", not the base forecast, but a scenario the market is generally underestimating the probability of. This distinction is important—institutions are pointing out risk, not guaranteeing outcomes.

~~~~~~~~~~~~~~~~~~~~~~~~

The above brilliant content is from Chase Trend Trading Desk.

For more detailed interpretation, including real-time analysis and frontline research, please join [Chase Trend Trading Desk Annual Membership]

Risk disclaimer and termsThe market has risks, investment should be approached cautiously. This article does not constitute personal investment advice, nor does it take into account any particular user’s unique investment objectives, financial condition, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific circumstances. You invest at your own risk. ```