JAMIE McGEEVER: Hedge funds go all in on strong dollar

Looked at through a currency market lens, the verdict from hedge funds on the recent wave of developing world central bank policy meetings could not be clearer — do not bet against the mighty dollar.

The latest commodity futures trading commission (CFTC) data shows that speculators are going “all in” on a stronger dollar, particularly against Group of 10 (G10) currencies, and especially the Japanese yen and Swiss franc.

Figures for the week to Friday show that speculative CFTC accounts increased their net long dollar position against a range of G10 and emerging currencies to $13.5bn, the highest since September 2022.

The net long position against G10 currencies was even higher at $17.64bn, a level not seen since July 2022. In both cases, most of the surge has come in the past few weeks during which time the Federal Reserve, European Central Bank (ECB), Bank of Japan (BoJ) and Swiss National Bank (SNB) all held policy meetings.

From a relative rates perspective, the dollar has emerged as the victor. Fed policymakers lifted the median “dot plot” and long-run neutral rate projections, the BoJ’s historic rate hike was deemed to be “dovish”, the ECB could ease policy before the Fed, and the SNB was the first developing world central bank to cut rates.

Even those who are more gloomy on the dollar’s longer-term prospects recognise its relative attraction in the short term.

“The bar remains high ... to boost the dollar substantially, but signs of continued economic resilience in the US could still keep the greenback on the front foot in the short term,” Capital Economics senior economist Jonathan Peterson wrote last week.

Yen and Swiss franc

Speculators appear to agree. 

In the week to March 26 they increased their net short yen position to 129,106 contracts, CFTC data shows. That is close to the 132,000 contracts net short in February, which was funds’ biggest bet against the yen in more than six years.

A long position is essentially a bet that an asset will rise in value, and a short position is a wager its price will fall.

Funds have increased their net short yen position in nine of the past 11 weeks, the two outliers being in the run-up to the BoJ’s historic rate hike in March.

The CFTC funds’ short yen position is now worth $10.65bn and the renewed bearishness is probably one of the reasons the Japanese currency hit a 34-year low against the dollar last week.

CFTC data also shows hedge funds grew their net short Swiss franc position in the latest week to the largest in almost five years. It now stands at 22,627 contracts, a bet worth more than $3bn — both are the highest since June 2019.

Funds also continued to reduce their net long euro position, which now stands at 31,194 contracts, a $4.2bn bet on the euro appreciating. Both are the smallest since September 2022.

Reuters