Hedge Funds on the Brink of Abandoning Bullish Dollar Bets

(Bloomberg) — Hedge funds are poised to exit bullish dollar bets on the prospects for an end to Federal Reserve rate hikes.

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A gauge of leveraged funds’ long positions on the greenback against eight currencies slid by more than four-fifths as of June 27 from a week prior, according to data from the Commodity Futures Trading Commission aggregated by Bloomberg. It dropped to 5,196 contracts, the lowest since March 7.

The world’s reserve currency has been on a downtrend since peaking in September and the Bloomberg Dollar Spot Index has declined in four of six months this year.

Fed Chair Jerome Powell said on June 22 that the US may need one or two more rate hikes this year. But falling bets against the US currency suggest hedge funds are looking past those, and instead focusing on an eventual start to rate cuts that may begin as early as the first quarter of next year, according to data on overnight-indexed swaps.

In addition, peers such as the European Central Bank may need to boost rates further to contain stubborn inflation, which could make the dollar relatively less attractive.

Read more: Euro-Area Core Inflation Quickens Again in Setback for ECB

“While markets concede that the Fed may hike a bit more, the peak-dollar story is well entrenched and hedge funds are positioning for even more US dollar weakness from here,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “There’s thinking the Fed can’t go much further, especially when you contrast that with Europe, and that’s reflected in how much the long dollar bets have unwound.”

Read more: The World’s Most Painful Trade Is Finally Ending as Dollar Peaks

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