The US dollar strengthened for a second consecutive session as hedge funds and currency traders pared back bearish positions, amid growing doubts that the Federal Reserve will deliver three interest-rate cuts in 2026, according to a report by Bloomberg.
Hedge funds reduced short positions against the greenback on Tuesday as strategists questioned whether incoming economic data – particularly inflation – will give the Federal Reserve sufficient scope to ease policy as aggressively as markets had anticipated. Money markets are currently pricing around 60 basis points of rate cuts by year-end.
The Bloomberg Dollar Spot Index rose as much as 0.4% during New York trading before paring gains, marking a modest rebound for the currency. Investor positioning remains light, however, with exposure to the dollar at its lowest level since at least 2012, according to a recent survey by Bank of America Corp.
Strategists warned that the dollar could rally further if expectations for rate cuts are scaled back. Elias Haddad, global head of markets strategy at Brown Brothers Harriman, said expectations for easing “look stretched”, citing resilient US growth and underlying inflation that remains above the Fed’s 2% target.
Analysts at Danske Bank, led by chief FX analyst Jens Naervig Pedersen, said stronger-than-expected US jobs data has weakened the case for near-term “insurance” cuts, with the bank now expecting rate reductions in June and September before a prolonged pause.
Despite the near-term rebound, some market participants remain cautious. Win Thin, chief economist at Bank of Nassau 1982, said recent private payrolls data did little to dispel concerns about underlying labour market weakness.
The dollar has fallen around 10% since early 2025, when Donald Trump returned to the White House, with investors rattled by policy uncertainty and renewed trade tensions. The Bloomberg Dollar Spot Index hit a four-year low in late January, prompting options traders to position for further downside.
However, FX traders said hedge funds trimmed dollar shorts this week, while options markets suggest near-term bearish sentiment has eased, with front-end risk reversals at their least negative level in almost a month.
Bank of America’s survey showed investors remain highly sensitive to data that could force a repricing of Fed expectations — a shift that could reignite dollar strength if rate cuts are delayed or reduced.
