Hedge Funds Are Suddenly Betting Against The US Dollar

Hedge Funds Are Suddenly Betting Against The US Dollar
Reda Farran, CFA

over 1 year ago2 mins

The dollar has been on a tear this year, and hedge funds saw it coming: you can see from the chart above – which shows their collective positions on dollar-linked futures contracts – that they’ve been betting for the last 15 months that the dollar would keep rising against a variety of currencies. But last week, those long positions turned short, meaning hedge funds are now betting against the greenback.

It’s probably because they’re expecting the Federal Reserve to stop raising rates so dramatically, which would make the currency less appealing to international savers and investors. They might be right: data out last week showed that US inflation dropped off by more than economists were expecting in July, with traders subsequently reducing the odds that the Fed will hike rates by another 0.75 percentage points. Some are even speculating that the Fed will cut rates next year, as the central bank tries to get the US economy out of a technical recession.

Whether the Fed stops hiking rates so fast or cuts them outright, it wouldn’t be good for the dollar. And while it’s true that the greenback functions as a safe haven in times of recession, that benefit is outweighed by the potential impact of those lower rates. That might be why the dollar is already losing steam: an index tracking the value of the dollar versus a basket of currencies (black line above) has fallen more than 3% from its all-time high in July.

With that in mind, it’s no real surprise hedge funds are starting to abandon ship. And if their bearish call turns out to be right, the dollar’s rally would finally be over. That could benefit US companies that earn a significant part of their revenue overseas, like Big Tech: anything they make will be worth more when they exchange it back into US dollars.

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