Risk aversion returns, combined with expectations of interest rate cuts reversing. Traders shift their focus to buying the US dollar for the first time this year.

The latest data shows that traders have turned bullish on the US dollar for the first time this year, as hedging demand and changes in interest rate expectations are driving this trend reversal. According to data released by the US Commodity Futures Trading Commission (CFTC) on Friday, as of March 17, speculative funds such as hedge funds and asset management institutions have accumulated approximately $6.2 billion in long US dollar positions, reversing the bearish trend on the dollar that has been persistent since mid-December. Previously in mid-February, bearish bets on the US dollar in the market had reached around $22 billion. This change occurred in the three weeks following the US military action against Iran. The escalation of the conflict has led to a continuous rise in international oil prices, pushing up inflation expectations and strengthening the US dollar. Data shows that since March, the US dollar index has risen by about 2%, on track to achieve its largest monthly increase since July last year. Analysts point out that the recent trend of the US dollar shows a strong correlation with oil price performance. On one hand, the rise in energy prices intensifies inflation pressures, weakening market expectations of the Federal Reserve cutting interest rates; on the other hand, amidst heightened global market volatility, funds are flowing back into the US dollar as a high liquidity safe-haven asset. Strategists from BMO Asset Management Company state that in sudden shock events, investors often quickly reduce their risk exposure, "which means closing out short positions on the US dollar", while the liquidity and safe-haven properties of the US dollar further enhance its attractiveness. At the same time, there has been a clear shift in Wall Street firm views. JPMorgan Chase strategists have recently turned bullish on the US dollar for the first time in a year, pointing out that in an environment where both stock and bond markets are under pressure, the US dollar is the "most prominent defensive asset". Changes in market expectations are also reflected in the interest rate path. With the rise in oil prices and increased inflation risks, the narrative of "multiple rate cuts" that had been dominating the market quickly disintegrated. The latest pricing shows that traders have completely erased expectations of rate cuts within the year, and are even starting to bet on the possibility of the Federal Reserve raising rates later this year, with the related probability rising to around 50%. Foreign exchange traders point out that the Iran conflict and the surge in energy prices have fundamentally impacted market expectations, not only ending expectations of a rate cut cycle, but also accelerating the closing of short positions on the US dollar, pushing the dollar into a new upward cycle.