Extreme Dollar Sentiment — Is a Reversal on the Horizon?

During the Asian session on Wednesday (May 21), spot gold extended its rally, briefly climbing to a one-week high of $3,313/oz. The surge came amid rising geopolitical tensions, as reports emerged that Israel had struck Iranian nuclear facilities—triggering a wave of safe-haven demand. At the same time, continued weakness in the U.S. dollar added a second leg to golds upward momentum.

“Dollar Sentiment Turns Bearish as Short Bets Hit Record Levels”

Beyond geopolitical risk, a key driver of gold‘s rally lies in the dollar’s persistent decline. The U.S. Dollar Index has broken below the critical 100 level, marking a nearly 10% drop year-to-date. This makes dollar-denominated gold more attractive for non-USD buyers. Notably, the FX options market is flashing deeply bearish signals: the 1-year risk reversal has fallen to -27 basis points, a record low, and net dollar short positions are nearing $16.5 billion—levels not seen since September last year.

This trend reflects growing concerns over the U.S. economic and fiscal outlook, along with limited room for the Federal Reserve to maneuver. Structurally, the greenback remains under pressure.

“Overcrowded Bear Trade Sets the Stage for a Potential Dollar Bounce”

While bearish consensus dominates, extreme negative sentiment may be setting the stage for a technical rebound. A short squeeze in the dollar could temporarily cap golds upside.

Adding complexity to the narrative, turbulence in Japan‘s bond market could lend relative support to the greenback. On Tuesday, Japan’s 20-year bond auction flopped, with the bid-to-cover ratio dropping to 2.5 and tail spreads hitting their widest since 1987. This drove long-term yields sharply higher and reignited policy debate within the Bank of Japan.

If Japan pivots back toward monetary easing, the yen could weaken significantly, prompting capital flows into dollar assets. In this case, the dollar could gain on both safe-haven and yield-driven inflows. In short, while near-term sentiment favors dollar weakness, the downside may now be limited.

Gold Outlook: Strong But Vulnerable to Sentiment Shifts

Gold remains in a bullish structure, supported by risk-off flows and a weaker dollar. However, any rebound in the dollar or normalization of market sentiment could slow golds upward momentum. In a world rife with geopolitical and monetary policy uncertainty, gold continues to prove its value as a haven asset. Yet the highly one-sided positioning means that any sudden catalyst could trigger sharp counter-moves. Investors are advised to stay long gold cautiously while preparing for potential short-term corrections stemming from dollar sentiment reversals.

[Gold Technical Snapshot]

Gold touched $3,313 before retreating slightly, with the RSI entering overbought territory—suggesting short-term momentum may be fading. The U.S. Dollar Index also shows early signs of a bottoming pattern. If the dollar continues to rebound, gold could face additional pressure. With resistance heavy in the near term, chasing gold at current levels may carry risk. A sustained break above $3,300 is needed to reestablish bullish momentum.

• Resistance Levels: $3,313 / $3,350

• Support Levels: $3,200–$3,220 / $3,248

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