Hedge Funds Bet Dollar to Erase Hike-Cycle Gains as Fed Peaks

(Bloomberg) — Investors are piling into bets against the US dollar as this week’s expected Federal Reserve interest-rate hike is likely to bring the steepest tightening cycle in a generation to a halt.

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Hedge funds and other large speculators boosted their net bearish position on the greenback against major peers to more than 70,000 contracts as of April 25, the most since June 2021, data from the Commodity Futures Trading Commission show. The currency is set to erase all of the gains posted since the Fed started raising the cash rate last March, according to Bloomberg’s gauge of the dollar against major trading partners.

The Fed is seen as almost certain to hike its rate by a quarter point this week, but then swaps traders are pricing for it to hold policy before turning toward lowering the benchmark by year’s end. With the European Central Bank and the Bank of England expected to be more aggressive in coming months, speculators are focusing on the potential that the euro and the pound will extend gains that have made them among the three best performers this year across major developed currencies.

“We remain positive on the euro, amid a strong consensus that the Fed will be ‘one and done’ while the ECB has more to do,” said Andrew Ticehurst, a rates strategist for Nomura Holdings in Sydney. “The thinking is that the ECB and BOE will out-hike the Fed, especially with the US outlook clouded by recession fears and concerns about the banking sector and the debt ceiling.”