Dollar Faces High Bar for Further Gains Ahead of FOMC Meeting

The US Dollar is entering its Federal Open Market Committee (FOMC) meeting with strong recent demand but stretched positioning, according to BNY's Geoff Yu. Cross-border buying and late-July spot demand remain supportive of the dollar, but month-end rebalancing, light hedge ratios, and softer cash demand raise the bar for further gains.

Yu notes that cross-border flows continue to anchor overall USD demand, with their lead in average flow scores remaining clear. The dollar's recent buying phases have seen strong interest, particularly in June when the gap between cross-border and local demand was widest.

However, Yu cautions that month-end rebalancing should generate more hedge demand, although weaker equities and fixed income may already be reducing exposures and mechanically lifting hedge ratios. This adjustment may come through both active hedging and passive exposure reduction.