Washington releases hawk, U.S. dollar "turning point" is here?

The Federal Reserve's new chairman, Powell, sent a strong hawkish signal during his first interest rate meeting after taking office, sparking a rally in the US dollar and causing a crucial shift in market expectations for the dollar's direction. The US dollar index rose by about 1% over the course of Wednesday and Thursday, marking the largest two-day increase in three months and nearing the peak at the end of March. The futures market has fully priced in a 25 basis point rate hike by the Fed before October, with some traders even seeing July as a possible window. The Euro fell to its lowest point since the end of March, the Canadian dollar hit its weakest level since April 2025, and the Japanese Yen fell to a nearly two-year low. The reaction in the options market was particularly notable. According to Bloomberg, hedge funds and leveraged funds have been buying US dollar call options in large quantities since Wednesday, with trading volume in Euro to US dollar options reaching the highest level since March 3 this year, and trading volume in Pound to US dollar call options surpassing put options by more than five times. US Bank FX strategist Alex Cohen called this meeting "undoubtedly hawkish, therefore undoubtedly bullish for the dollar", while Rabobank currency strategist Jane Foley stated that this meeting has "reactivated" the dollar bulls. The hawkish debut reshapes the market narrative During his first press conference as Fed chairman, Kevin Powell emphasized the central bank's mission to fight inflation, with his firm stance leading to a reassessment by the market. MUFG Bank strategist Lee Hardman stated that the Fed's hawkish policy update "is threatening to trigger a breakout in the dollar bulls", and its effect has surpassed the suppressive impact of the US-Iran peace agreement on the dollar. Bloomberg strategists also pointed out that the previous market expectation of the Fed's dovish inclination has been a key factor in suppressing the dollar, a narrative that is rapidly disintegrating after the latest FOMC meeting. As the market focus shifts back from the Iran situation to economic data, the dollar is expected to receive further support. Following the signing of the US-Iran peace agreement, oil prices have fallen, and market attention has returned to the fundamentals of the US economy. US inflation has accelerated to around 4% recently, reaching a three-year high and double the Fed's 2% target, driven by the AI investment boom and energy price shocks. Large-scale call options emerge in the market The drastic changes in option positions visually demonstrate a shift in market sentiment. Tobias Jungmann, head of FX options trading at US Bank in New York, stated, "We are seeing a large amount of buying in US dollar call options", mainly focused on G10 currencies. The current lower implied volatility levels make establishing a long position in the dollar through options "quite attractive". James Swindell, senior FX options trader at Barclays, stated, "We are seeing a surge in demand for US dollar call options across the board, especially in Euro to US dollar and Pound to US dollar pairs, in various forms such as vanilla options and digital options." CME Group data shows that on Thursday, the trading volume of US dollar call options against the British Pound exceeded put options by more than five times. DTCC data shows that trading volume in Euro to US dollar options has risen to the highest level since March 3 this year, with call contracts valued at 200 million Euros (approximately $229 million) and above trading almost twice as much as put contracts of the same size. Rate hike expectations boost yield differentials, making US dollar assets more attractive After futures traders included a 25 basis point rate hike by the Fed in September in their benchmark scenario, short-term US bond yields significantly increased, widening the interest rate differentials with many other countries and providing new incentives for global investors to move into US dollar assets. Record trading volumes in the government bond futures market further solidify the market's bet on the Fed's next move being a rate hike. According to Commodity Futures Trading Commission (CFTC) data compiled by Bloomberg, as of June 9, hedge funds, asset management firms, and other speculative funds collectively held $27.78 billion in long US dollar positions, the highest since February 2025, with the latest position data expected to be released on Monday. Ugo Lancioni, senior portfolio manager at Neuberger with assets under management of $576 billion, stated that while the company still holds a bearish view on the dollar in the medium term, mainly due to overvaluation, the "strong US macroeconomic data, inflation pressure from energy shocks, and the AI investment cycle continue to support the dollar". Divergence in the direction of the Yen, intervention risks make bets more complex In this round of US dollar rally, the Yen is a clear exception. The Yen has fallen to its weakest level since July 2024, sparking concerns in the market about intervention by the Japanese Ministry of Finance. Japanese Finance Minister Satsuki Katayama stated on Friday that the government can take "bold action" against speculative exchange rate fluctuations. James Swindell pointed out that in the direction of the US dollar against the Yen, "the market is showing a clear divergence, with some clients betting on the US dollar continuing to rise against the Yen, while others are positioning their positions for a potential rapid decline triggered by intervention". This divergence has made the option positions in the US dollar against the Yen more balanced compared to currencies like the Euro and Pound, and has also restrained the overall US dollar rally in the direction of the Yen.