Speculators' bullish dollar positions have grown about sixfold in three weeks, mostly at the euro's expense. Futures put the chance of an October hold at about 81%. Wednesday's inflation report arrives two days after a holiday that shut the cash Treasury market.
The dollar's rally this autumn has usually been explained by the Federal Reserve. The latest leg is happening while traders lean the other way on the Fed.
At about 102.1 early Monday, the dollar index, a basket against six major currencies, sat just under the roughly 102.5 peak it set last week, its highest in 18 months. Speculative investors held bullish dollar positions worth about $36 billion in the week to Oct. 6, according to Commodity Futures Trading Commission data compiled by Saxo, up from about $6 billion three weeks earlier. Most of the increase came at the expense of the euro.
Why, if not the Fed
Market pricing has moved away from an immediate rate increase. Futures implied about an 81% chance the Fed holds at its Oct. 27-28 meeting, up from about 51% at the end of September, according to CME Group's FedWatch tool. Kalshi's contract on a quarter-point October increase traded near 15 cents overnight.
What has changed is the rest of the world. The euro traded near $1.12 after five consecutive weekly losses, weighed by France, where the gap between 10-year French and German government bond yields has widened to about 1.38 percentage points, near its widest since 2012. The yen was near 158.4 per dollar early Monday. Gulf attacks and energy prices have pushed investors toward the dollar as a haven even as hike expectations faded, which is the opposite of the usual relationship.
Not every currency is losing. China's yuan touched its strongest level of the year against the dollar on Monday. India's currency was the day's standout, gaining about 1% to 95.7 per dollar once the Reserve Bank of India steered oil importers' dollar buying away from the spot market.
The Fed's hawks
Officials have not let the hike debate go. The Fed raised rates in September for the first time since 2023. Cleveland Fed President Beth Hammack said in an interview published over the weekend that companies' pricing power and a sturdy economy show rates are not yet high enough to tame inflation. Governor Christopher Waller speaks on Tuesday, and Chair Kevin Warsh appears in Bangkok on Thursday alongside the International Monetary Fund's managing director.
The data
Wednesday at 8:30 a.m. Eastern brings the September consumer price index. The consensus calls for core prices, which strip out food and energy, to rise 0.2%, a tenth of a point less than in August. Producer prices and retail sales follow on Thursday.
U.S. cash bond markets are closed Monday for Columbus Day, so the 10-year Treasury yield is unchanged from Friday's close near 5.24%. Its peak last week was the highest since 2002.
Two readings
One reading is that the dollar has become a safe-haven trade. Positioning is driven by stress in Europe and the Gulf, and a soft inflation print would not reverse it, because the reasons for owning dollars sit outside the U.S.
The other is that the dollar is vulnerable to Wednesday's data. With the market already leaning toward a hold, a cool core reading could push December hike bets lower too, while speculators sit on a long position that has grown about sixfold in three weeks. A hot reading would do the opposite and could revive talk of a move before March.
What decides it
Core CPI against the 0.2% forecast is the first test. Weekly positioning data on Friday will show whether speculators added to their dollar bets into the release, and the French-German spread will show whether the euro's weakness is easing.