Is Everyone Wrong About the Dollar? | Macro Mondays

The dollar reached its highest level against the Japanese yen since 1986, a move Andreas acknowledged was stronger than he anticipated. The rally was driven by Kevin Warsh's hawkish pivot at his first FOMC press conference, where every single forecast was revised in a more hawkish direction, the number of words in the press release was cut, and Warsh signaled the committee would take guidance from markets rather than the reverse. No visible political pressure on Warsh has emerged, and he has not acted as a political puppet pushing rates lower regardless of data.

Inflation data and inflation market pricing have been falling for nearly two months while Fed rhetoric has turned more hawkish, creating an unusually large disconnect that pushes real rates higher and strengthens the dollar. The dollar's outperformance relative to other currencies reflects the fact that the US had priced in rate cuts heading into the new chairmanship, making the shift to a hawkish stance a larger change of scenery than in the eurozone or Australia, where a similar pivot also occurred. This behavior is characterized as a generals-fighting-the-last-war syndrome, where Fed members who underestimated inflation in 2021 and 2022 now prefer to overestimate it. Andreas frames this as a forecasting mistake rather than a policy mistake because no actual rate hikes have been implemented.

Core inflation in Spain for June came in soft, consistent with a broader soft inflation surprise expected across the eurozone. June US job creation is expected to come in softer than the prior month, with a possibility of falling below 100,000. The prior month's strong number was largely attributable to leisure and hospitality hiring tied to the World Cup, making it arbitrarily strong and difficult to interpret. Seasonal adjustment for both inflation and employment during a World Cup period is not practically possible, so data over the next several months is likely to look softer than current Fed forecasts.

Heading into vacation season, positioning typically involves lowering leverage and notional sizes, which can reverse prevailing trends. A move lower in the dollar is possible given that long dollar is currently a very popular trade, and buying of the Japanese yen is also possible as it is currently the most unpopular trade. Some reversal of shorts in software and metals is possible as vacation season positioning unwinds, and the semiconductor and AI chip trade could lose momentum as popular positions are squared ahead of the break.

The drop in the token expenditure index reflected the marginal user shifting to cheaper Chinese open source models rather than an overall slowdown in AI demand volume, with token usage volumes continuing to rise in June even as the average price per million tokens fell. Rental prices for Blackwell GPUs and memory pricing did not show the same drawdown seen in the token expenditure index. Demand for memory was likely front-loaded due to the Iran war, as buyers feared helium gas capacity shortages in the second half of the year. DRAM spot prices accelerated again after the end of Micron's quarterly period covering March through May. Apple has asked the Trump administration for access to Chinese memory chip manufacturers due to supply constraints, and the administration is expected to deny that request. Chip scarcity is expected to affect consumer electronics, cars, and other downstream products in the second half of the year as a byproduct of AI demand front-loading. Micron is among the two most popular retail trades, with high participation on both long and short sides driving elevated volatility and forcing institutional investors into smaller position sizes for equivalent risk.

Speculator positioning data shows everyone is currently short oil. Oil flows through the Strait of Hormuz have been decent since a memorandum of understanding was signed but are not back to pre-war levels and are not expected to return to them. Iran appears to be attempting to establish effective control over the Strait in order to levy tolls on shipping, and bypassing of the Strait is continuing. The US has been actively escorting ships through the Omani shipping lane, which now functions as a distinct route separate from the Iranian lane. As long as the Strait is not completely closed again, markets can cope with a partial Strait scenario, as the world has managed without full access for an extended period.

Andreas noted his data has been signaling that dollar inflation is coming down and that energy spike effects have ended, but the market has not yet responded accordingly. The Real Vision portfolio recorded a significant gain in a biotech or healthcare stock tied to what Andreas described as probably the first breakthrough in depression drugs in fifty years.