Was Powell ushering in a “turning point” for the dollar? Wall Street “gets the message.”

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The hawkish debut of the new Fed Chair Walsh is reshaping Wall Street’s overall view on the dollar.

At his first monetary policy meeting after taking office, Walsh emphasized the central bank’s mission to fight inflation, and his strong wording quickly led markets to reprice. The dollar index has risen 2.1% so far in June, marking one of its best monthly performances in nearly a year, as traders began betting on a Fed rate hike as soon as July, and the options market saw a surge in large-scale dollar bullish bets.

Major Wall Street institutions such as JPMorgan, Bank of America, and Goldman Sachs have all voiced renewed confidence in the dollar’s outlook.

This shift is significant. Just over a year ago, "hedging against U.S. risk", de-dollarization, and currency depreciation trades were still mainstream market narratives, but now these themes have faded away. MUFG Bank strategist Lee Hardman said the Fed’s hawkish policy update "threatens to trigger a bullish breakout for the dollar," an effect already eclipsing the negative dollar impact from the U.S.-Iran nuclear deal talks.

The Fed "activates" dollar bulls

Meera Chandan, Co-Head of Global FX Strategy at JPMorgan, stated bluntly that the Fed has "activated" the bullish dollar outlook. “Other central banks don’t seem likely to catch up, so the dollar's rate differential won’t narrow,” she noted in an interview.

At Walsh’s first post-meeting press conference, his firm emphasis on price stability significantly pulled forward market expectations about the rate hike path. TD Securities Head of FX Strategy Jayati Bharadwaj summarized this shift: "U.S. data is resilient, the economy is robust, the new chair is hawkish and talking about policy credibility and price stability. The threshold for a Fed hike is now lower, and this represents a shift in market perception."

The Bloomberg Dollar Spot Index is now trading at its highest level since November, up 1.7% year to date. June’s gain rivals the oil price-driven rebound seen in March. Chandan noted, “The true market driver baton has passed from energy to the Fed’s policy response.”

Treasury support, bulls and bears regroup

The hawkish Fed is not the only support for dollar strength. Treasury Secretary Bessent has recently reaffirmed support for a strong dollar policy and has publicly endorsed Walsh. However, Bessent stressed that what maintains the dollar’s dominant role in the global economy is the U.S. policy framework, not the exchange rate itself.

At the institutional level, funds are accelerating into bullish dollar positions. According to CFTC data as of June 16, hedge funds, asset managers, and other speculators are holding a collective $29.4 billion in long dollar positions. Hedge fund Man Group expects the dollar to rise another 5% by year-end, while TD Securities forecasts a moderate 2% gain in the third quarter.

Alex Cohen, FX Strategist at Bank of America, believes the dollar "still has upside." On Thursday, the bank lowered its year-end EUR/USD forecast from 1.20 to 1.15, expecting the Fed to hike rates three times this year. Earlier this week, ECB President Christine Lagarde lowered rate expectations due to Eurozone economic weakness, sending the euro to a one-year low and further highlighting policy divergence between the U.S. and Europe.

AI trading provides extra momentum

Beyond monetary policy, the artificial intelligence boom is becoming another main driver of dollar strength. Kamakshya Trivedi, Goldman Sachs Chief FX and EM Strategist, said “The reality is, AI trades are boosting expectations for U.S. economic growth and equity returns, making it a magnet for capital.”

Steven Englander, Global Head of G-10 FX Research at Standard Chartered, also believes AI-related productivity gains are underpinning the dollar’s positive outlook, with capital inflows and corporate earnings improvements continuing to support the dollar. George Saravelos, Deutsche Bank’s Head of Currency Strategy, views the dollar as the "major beneficiary of future AI income streams."

Trivedi points out that the path of dollar strength is not uniform: The dollar will pressure low-yield currencies and especially those sensitive to oil prices, but could underperform against high-yield and trade-sensitive currencies—such as the Mexican peso, Brazilian real, and Australian dollar. Goldman Sachs expects the baht and the Philippine peso to weaken against the dollar over the next three months.

The rally may not be smooth sailing

Despite the prevailing bullish sentiment, some institutions are cautious on how sustainable the rally will be. Barclays strategists warned, "The dollar’s upward path may not be linear," as rate hike expectations are already priced in, market sentiment is overwhelmingly bullish, and oil prices and U.S. economic data may be near short-term peaks.

TD Securities’s Bharadwaj also noted that for the dollar to appreciate further, the Fed would need to hike more than what the market is currently pricing in—currently about one or two 25-basis-point hikes before early next year.

Additionally, based on signals from the options market, the premium for betting on dollar appreciation versus depreciation over the next 12 months is near the highest in over a year, approaching the five-year average, but still below the previous peak during the last "U.S. exceptionalism" market phase. This suggests there is still room for longs, but also a need to beware of excessive concentration of expectations.

Risk Warning and DisclaimerThe market carries risks; investment should be made cautiously. This article does not constitute individual investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular situation. Investing accordingly is at your own risk. ```