- The Bloomberg Dollar Spot Index is on track for a 0.7% weekly loss — touching its lowest level since May — as Fed Governor Christopher Waller signaled willingness to hold rates steady if disinflation continues, cutting September hike odds from ~70% to roughly even odds in a matter of days.
- Speculative dollar longs have already been unwinding: hedge funds, asset managers, and other traders cut bullish dollar positions to ~$27.6 billion in the week through Aug. 25 — down from nearly $50 billion at end of July, when long dollar was the largest consensus trade since 2014.
- Bank of America recommends selling the dollar against the yen with a year-end target of 149 per dollar (from current levels near 156); TD Securities maintains a “moderately bearish dollar view” for the rest of 2026, citing fiscal concerns and shifting Fed expectations as structural headwinds.
- Friday’s payrolls report (expected: 4.1% unemployment, steady) and next week’s CPI are the next binary catalysts — an in-line or soft inflation print would likely remove September hike odds entirely, extending dollar weakness; a hot print would reverse the week’s move and restore hike pricing.
What Happened?
The dollar fell to its lowest level since May this week as two forces converged: hawkish BOJ signals sparked a yen surge that rippled through G10 currency markets, and Fed Governor Christopher Waller offered dovish guidance, saying he’d support holding rates steady if disinflation progress continues. The Bloomberg Dollar Spot Index is down 0.7% for the week. Waller said his September decision will be “heavily influenced” by the August CPI report due next week, noting “recent data suggest we are finally seeing some signs of disinflation” — walking back the market’s prior 70% probability of a September hike to roughly even odds.
Why It Matters?
The dollar’s pullback is happening against a backdrop of structurally elevated long positioning that has been slowly unwinding since July. Bullish dollar bets peaked at nearly $50 billion at end of July — the largest since 2014 — and have since dropped to $27.6 billion. That residual positioning means further unwinds could amplify any dollar weakness from here if macro data comes in soft. More broadly, the dollar’s trajectory is a read on global risk appetite: a weaker dollar loosens financial conditions for emerging markets, supports commodity prices, and shifts the calculus on US-denominated assets for foreign investors sitting on unusually high dollar exposure.
What’s Next?
August payrolls Friday and August CPI next week are the pivot points. CIBC strategist Noah Buffam frames it clearly: the dollar stepped back on “Fed speak leaned dovish and a yen rally spilled over to the broader USD complex” — both of which are data-dependent and could reverse sharply on a hot inflation print. TD Securities and Bank of America are structurally bearish on the dollar for the rest of the year, with BofA targeting 149 yen per dollar by year-end. The September 15-16 Fed decision is the next major catalyst, and the path of the dollar into that meeting will be determined almost entirely by next week’s CPI.
Source: Bloomberg
