Funds build biggest short dollar position since March 2021

ORLANDO, Florida, July 23 (Reuters) – Hedge funds have ramped up their bearish dollar bets by more than USD 7 billion in a week, and are now sitting on their biggest net short dollar position in over two years.

The move was largely down to shifts in net euro and yen holdings, and comes ahead of monetary policy decisions from the Federal Reserve, European Central Bank, and Bank of Japan.

Foreign exchange speculators’ long sterling positions are now the biggest on record, although decent interest in shorting the pound means the overall net long position remains at a 16-year high, not an all-time peak.

Commodity Futures Trading Commission data for the week to July 18 show speculators’ increased their net short dollar position against a range of G10 and emerging currencies to USD 20.6 billion from USD 13.17 billion the week before.

It is the most substantial bet on the dollar falling since March 2021, and marks the 37th week in a row funds have been net short.

The USD 7.4 billion bearish shift in funds’ overall dollar position was the largest since March 2020, and was mostly accounted for by the USD 5.8 billion and USD 2.3 billion moves in euro and yen positions, respectively.

To be ‘short’ an asset is essentially a bet that it will fall in value, while to be ‘long’ is effectively a bet that it will appreciate. Investors often use futures contracts to hedge positions, but the CFTC data are often a pretty good guide to hedge funds’ directional view on a given asset.

The value of funds’ short dollar position is big, but not extreme. It was much larger for long spells around 2006-2008, 2010-2011, and 2020-2021, and it is still only half of the record bets in 2011 that topped USD 40 billion.

But the net long euro position is nearing record levels, perhaps not a total surprise given that the trade-weighted euro last week hit its strongest level ever.

Funds increased their net long position by almost 40,000 contracts to just under 180,000 contracts, nearing the all-time high of more than 200,000 contracts in August 2020.

That’s a USD 25 billion bet on the euro rising.

It’s a different story with the yen, where funds are still heavily short, but they scaled that bet back significantly in the week through July 18. Earlier this month, their net short position was the largest in five and a half years.

We will only get the full picture of CFTC funds’ pre-G3 central bank positioning with data for the week ending July 25, which will be released after the policy decisions.

The latest snapshot for the week through July 18, however, suggests speculators may be positioning for a more dovish Fed relative to the ECB, and are trimming a large and profitable short yen position.

(By Jamie McGeever; Editing by Shri Navaratnam)