Scotiabank strategists Shaun Osborne and Eric Theoret note that the US dollar (USD) is strengthening on the Federal Reserve’s (Fed) higher and longer-term outlook, demand from some havens and mixed global equities. The US Dollar Index (DXY) is trending towards 102, with stronger resistance seen in the upper 102 area. They warn that markets may be overestimating the risk of Fed tightening and highlight the already long speculative positioning of the USD as a potential limit to further gains.

The strength of the dollar corresponds to the positioning risk

“The same is true for the dollar this morning, with a combination of a higher longer-term view on U.S. interest rates coupled with some heavenly demand from shaky stock prices and perhaps the realization that despite the positive comments, there are still some very significant gaps in the U.S.-Iran peace talks.”

“This morning, the US dollar has strengthened against all its major currencies, with DXY approaching the 102 mark on the chart (May 2025 high). From a technical perspective, stronger resistance may appear at the upper 102 area, which will represent a 50% retracement of the index decline in 2025/26 (102.86).”

“At this point, there is little stopping the U.S. dollar from remaining stable or strengthening further. We believe markets are overestimating the risk of Fed tightening, but this issue will not be resolved for some time.”

“However, positioning may be a limit to the dollar’s growth. Speculative positioning lasts quite a long time, as CFTC USD data suggests.”

“USD net long aggregate positions are approaching the highs seen in 2024 and early 2025 before the dollar came off its highs. Real money and hedge fund interest rates are lower, which could give the USD a bit more of a tailwind if bullish allocations are lifted.”

(This article was created with the support of an artificial intelligence tool and has been reviewed by an editor.)