Hedge Funds Go All In on Dollar for First Time in Over a Year

(Bloomberg) — Hedge funds are betting the greenback’s longest stretch of weekly declines in almost three years is about to reverse after investors ramped up pricing for Federal Reserve rate cuts to extreme levels.

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Leveraged funds were net short all major currencies against the dollar last week, the first time that’s occurred since January 2022, according to the latest Commodity Futures Trading Commission data. While a gauge of overall investor positioning remains bearish on the greenback, the broad degree of optimism among hedge funds may signal receding concern over the impact of the banking crisis on the Fed’s willingness to battle inflation.

The bets notched up a win Friday and the Bloomberg Dollar Spot Index snapped a three-day losing streak after Fed Governor Christopher Waller said he favored more rate hikes to combat persistently high prices. An unexpected surge in a gauge of consumer inflation expectations and better-than-expected US retail sales reaffirmed that view.

Traders will watch data including initial jobless claims this week as they seek to gauge the central bank’s policy path.

Last Tuesday, traders were pricing for a possible Fed hike in May followed by a switch to cuts as early as July, according to data compiled by Bloomberg. Markets now signal a small chance of a rate cut in September and a bigger one in November.

“Market pricing of November is too early for the FOMC to cut the funds rate given the high US underlying inflation pulse,” Joseph Capurso and Kristina Clifton, strategists at Commonwealth Bank of Australia wrote in a note to clients. The dollar is likely to recover its losses over coming months even if it tracks lower this week should US economic data disappoint, they wrote.

The greenback has fallen for five straight weeks, its longest losing weekly streak since July 2020. The US currency edged higher Monday, according to Bloomberg’s index.