BNY’s iFlow data show demand for the US dollar is increasingly linked to interest-rate expectations rather than safe-haven positioning as markets look ahead to the FOMC. The shift in drivers has come as the dollar firms, and the report says the current flow dynamics are likely to persist until the market adopts a different Federal Reserve narrative.
Within client activity, flows point to net selling of the Canadian dollar and Australian dollar, while only select North Asian currencies are drawing buyers. The report also says dollar hedges continue to unwind across G10, reinforcing the view that positioning is being shaped more by rate-sensitive considerations than by defensive demand.
Dollar Strength Driven by Fed Expectations, Commodity FX Under Pressure
We are seeing the US Dollar strengthen based on expectations for Federal Reserve policy rather than a flight to safety. Recent US data, such as the stronger-than-expected 210,000 jobs added in May 2026 and core inflation remaining sticky at 3.2%, supports the view that the Fed will not be cutting rates this summer. This trend is likely to give the dollar a firm floor in the coming weeks.
Given that dollar hedges continue to be unwound, we believe traders should consider strategies that benefit from a stable-to-stronger dollar. Selling out-of-the-money puts on the Dollar Index (DXY) with expirations in late July or August could be an effective way to collect premium. This position profits from declining volatility and the absence of a sharp dollar sell-off.
The weakness in the Canadian and Australian dollars appears set to continue, as our flow data shows consistent net selling. This is reinforced by a recent 8% dip in crude oil prices and a 10% fall in iron ore futures over the last quarter, dimming the outlook for these commodity-linked economies. We expect this divergence against the dollar to widen.
For traders looking to act on this, buying puts on the AUD/USD pair offers a direct way to position for further downside. The Reserve Bank of Australia has signaled a pause, and with a slowing Chinese economy impacting demand, the path of least resistance for the Aussie seems lower. We see opportunities in options dated for the third quarter.
Opportunities in North Asian Currencies Amid Policy Divergence
At the same time, we are noticing selective buying in some North Asian currencies, especially the Japanese Yen. The Bank of Japan has recently signaled a more concrete move away from its ultra-loose monetary policy, creating a clear policy divergence with a hawkish Fed. This tug-of-war is increasing tension in the USD/JPY pair.
This policy conflict between the US and Japan suggests a period of higher volatility for USD/JPY. We believe traders could use long straddles, buying both a call and a put with the same strike price and expiration date. This strategy is positioned to profit from a large price move in either direction as the market digests central bank actions.
