Speculators increased positive bets on the US dollar for a third straight week, pushing net longs to their highest since early January. The value of the dollar's net long position rose to $28.14 billion in the week ended December 6, from $24.82 billion in the previous week, according to Reuters calculations and data from the Commodity Futures Trading Commission released on Friday.
The continued rise in long dollar positioning is not a surprise given expectations of higher inflation with increased infrastructure spending under a Trump administration. With more upbeat US economic data including a generally solid US non-farm payrolls report for November, the Federal Reserve is widely expected to raise interest rates next week. That expectation has underpinned the dollar for the past several weeks, with the greenback posting a 3 percent gain so far this year.
The focus now turns to the number of rate increases the Fed could signal at the conclusion of the policy meeting on Wednesday. "There have actually been widespread improvements in the US economy with consumer spending up and inflation on the rise," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"The dollar will rise if the dot plot shows expectations for more than two rate hikes in 2017. The last plot had Fed Presidents looking for 50 basis points of tightening next year." Net shorts on the yen, meanwhile, rose to their largest since December last year, at 33,937 contracts. Speculators turned net short the yen last week after months of being long.
The yen has been engulfed in a Trump-inspired dollar rally. The longer-term rate differentials between the US and Japan 10-year notes continue to widen at more than 200 basis points, the largest gap in favor of the US dollar since 2010 and supporting further gains in the greenback against the yen. Euro short contracts, on the other hand, fell to 114,556, their lowest since mid-October.
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