Is the expectation of a rate hike peaking? Three major investment banks are against the trend and bearish on the US dollar, non-US currencies may see a "turning point".

Notice that the exchange rate strategists at Morgan Stanley, Crdit Agricole CIB, and Toronto Dominion Securities all belong to a group of contrarians, as they do not agree with the market consensus that the U.S. dollar will strengthen. The Bloomberg Dollar Spot Index surged by 2% in June, marking the largest monthly gain since the outbreak of the Iran war, and continued to rise at the beginning of July. Expectations that the Federal Reserve will maintain high interest rates or even raise them further have been the core driver behind this rebound. Previously, the newly appointed Fed Chair Kevin Wash emphasized at a press conference on June 17 that the central bank would focus on combating inflation. The momentum behind the dollar's movement is so strong that speculative traders' bullish stance on the currency has reached the most extreme level in a year and a half. In this context, more and more forecasting institutions (including Eurizon SLJ Capital led by Stephen Jen) are starting to believe that the potential gains from betting on a dollar rally have been largely exhausted. Valentin Marinov, Head of G-10 Currency Research and Strategy at Crdit Agricole CIB, stated, "The dollar now appears overbought and overvalued. The Fed's hawkish stance may not be as strong as the U.S. interest rate market expects." The stalled or slowing momentum of the dollar's rise will have significant implications for officials in various countries, including Japan, as it will reduce the risk of imported inflation. This week, faced with a strong dollar, the yen exchange rate hit a new 40-year low, increasing the risk of intervention by Japanese authorities. The next test of expectations regarding Fed policy will come on Thursday when the U.S. will announce employment data. It is expected that the data will show an increase of approximately 115,000 jobs in the previous month, accompanied by a slight increase in wages, a strong enough figure to maintain market bets on a Fed rate hike. Traders expect the Fed to raise borrowing costs by 25 basis points as early as October, and even hedge against the risk of taking action this month before the data is released. This contrasts sharply with the situation in late February before the outbreak of the war, when traders were expecting the Fed to lower rates in 2026. Rising oil prices and inflation expectations have shattered these predictions of rate cuts and combined with the resilience of the U.S. economy in recent months, have laid the foundation for the dollar's rise. This scenario explains why most institutions on Wall Street remain optimistic about this major global reserve currency. JPMorgan Chase, Bank of America Securities, and Goldman Sachs all advocate for a further strengthening of the dollar. HSBC HOLDINGS also stated that the sharp rise of the dollar could become one of the biggest "pain trades" in the latter half of this year. Samara Hamoud, a strategist at Commonwealth Bank of Australia, said, "As the U.S. economic performance continues to outperform its peers, it is expected that the interest rate differentials between the U.S. and other countries will move further in favor of the dollar. We still expect the Fed's Federal Fund rate hike to exceed market pricing." Market observers have pointed to another supporting factor, massive investments in artificial intelligence infrastructure, which have boosted corporate profits and attracted international capital inflows into the U.S. stock market. The bullish sentiment among traders regarding the dollar has reached the highest level since early 2025. The skeptical group does not believe that this narrative is about to collapse. They simply think that, in the backdrop of the Fed's possible wait-and-see stance in the coming months, most of these positives are already reflected in the dollar exchange rate. Socit Gnrale falls into this camp, as does Morgan Stanley, the latter expressing last week that they are not willing to "chase higher" on the dollar. On Wednesday, Wash stated at a central bank forum in Portugal that inflation risks have decreased in recent weeks and reiterated his determination to bring inflation back to the Fed's 2% target. Stephen Jen and his colleagues at Eurizon SLJ Capital wrote this week, "The market's shift in expectations for Fed policy may be somewhat overdone: we do not think the Fed will hike rates in this cycle. Repositioning the Fed's dovish stance could help ease the dollar's appreciation." Another major consideration is the economic outlook outside the U.S. Some strategists insist that after months of international turmoil that triggered safe-haven buying of the dollar, relative interest rate differentials are aligning in favor of competing currencies against the dollar. For example, the European Central Bank raised rates by 25 basis points last month, and market expectations suggest another rate hike is possible before December. A team of strategists led by Jayati Baladwai at Toronto Dominion Securities stated, "As global growth stabilizes, risk premiums subside, and central banks around the world narrow the interest rate differentials in the face of a Fed that remains on hold, the downward trend of the dollar should reemerge later this year."