Speculators this week slashed net long bets on the US dollar to their lowest since mid-May 2016 when investors overall had net short positions on the greenback, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday. The value of the dollar's net long position dropped to $135 million in the week ended July 4, from net longs of $4.5 billion the previous week. This week marked the first time since mid-April 2016 that net long dollar positioning fell to under $1 billion.
Futures contracts showed improvement in net positioning in most currencies against the dollar: euro and Australian dollar net longs rose, while net shorts on sterling, the Swiss franc, and the Canadian dollar fell, data showed. Since mid-May, long dollar positioning has been on a downtrend, driven by a mixed set of economic data such as low inflation that has spurred a gradual tightening pace from the Federal Reserve.
Low inflation has never been more apparent than in Friday's US nonfarm payrolls report, which had a strong headline number, but a lower-than-expected average wage growth of 0.2 percent. Earlier this week, the latest Fed minutes showed policymakers were split on the outlook for inflation and how it might affect the future pace of interest rate rises. The Federal Open Market Committee, for instance, also questioned why financial conditions had not tightened despite recent rate rises.
"Low inflation still poses a challenge for the Fed," said James Chen, head of research at Forex.com in Bedminster, New Jersey. "Lackluster wage growth as reported on Friday intensifies that challenge and questions the Fed's recently expressed confidence that inflation would pick up. At this point, monetary policy uncertainty continues to prevail," he added. That uncertainty has led investors to reduce net long dollar positioning after amassing them for more than a year. So far this year, the dollar index is down 6 percent.
Japanese yen net shorts, meanwhile, rose to their largest with 75,036 contracts, CFTC data showed. Those short contracts will likely expand especially after the Bank of Japan said on Friday it would buy an unlimited amount of bonds, as it sought to put a lid on domestic rates pushed higher by the broad sell-off in developed market bonds.