Hedge funds are piling into dollar shorts after the dollar's March surge largely reversed in April, as signs of a possible Washington‑Tehran ceasefire reduce safe‑haven demand, market participants and recent bank research show.

Funds shift as safe‑haven demand ebbs Investors have been steadily increasing bearish positions against the US dollar after signs that talks between Washington and Tehran could extend a ceasefire, according to market participants and recent research. A proprietary model run by Morgan Stanley showed hedge funds added to short‑dollar trades through 10 April, marking a clear pivot from the war‑driven buying that supported the greenback in March. The dollar’s recent run was dramatic: Bloomberg’s dollar index jumped 2.4% in March — the biggest monthly rise since July — as safe‑haven flows surged amid Middle East tensions. It then gave much of that back in April, falling about 1.9% and suffering an eight‑day losing streak through Wednesday, its longest such run since June 2020. Options markets mirror the rotation Derivatives pricing has moved in step with cash flows. Risk reversals on the Bloomberg dollar index — a gauge of the premium traders pay to hedge against a stronger dollar versus a weaker one — narrowed to levels last seen in late February, signposting less demand for protection against dollar upside. A Goldman Sachs research note dated 15 April said tactical dollar positioning had shifted in recent days from its most bullish levels in more than a year to roughly neutral. Large block trades in euro‑dollar call options have also outpaced put activity, an indication that some fast‑money desks are buying euro upside via options rather than owning spot dollars. Traders say funds are selling into strength Hedge funds aren’t waiting for a sustained downtrend. Ivan Stamenovic, head of Asia Pacific Group‑of‑10 currency trading at Bank of America Corp. in Hong Kong, said funds have been using volatile moves to build bearish exposure rather than buying dips. "From what we’re seeing, the hedge fund community is using choppy conditions to fade the dollar, selling into strength rather than buying dips," he said. Nomura’s Antony Foster, head of Group‑of‑10 spot trading in London, pointed to a specific turning point. He said the market had been "waiting to sell the dollar, and the first ceasefire proved the catalyst," describing the heavy selling on 8 April as one of the largest single‑day dollar sell days he had observed in both cash and options markets. Which currencies stand to gain? Analysts expect several majors to benefit if geopolitical risk continues to ease: - Euro: Morgan Stanley strategists said a ceasefire may lift risk‑sensitive currencies soon, with medium‑term dollar weakness likely concentrated against the euro. - Yen: Also cited as a likely beneficiary among major peers if risk sentiment improves. - Swiss franc: Listed alongside the euro and yen as a principal peer that could outperform the dollar. Richard Oliver, global head of FX cash at HSBC Holdings Plc in London, said fast‑money accounts were buying euro upside through relatively cheap option structures. "Modest de‑dollarisation is becoming an increasingly important medium‑term theme," he said, pointing to demand for instruments that profit from euro gains rather than outright dollar shorts in spot markets. Analysts also flag structural concerns that could keep pressure on the greenback.

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Analysts say the trend may persist: "The path to a weaker dollar is widening, not narrowing," Morgan Stanley analysts Molly Nickolin, David Adams and Andrew Watrous said.

This article was created with AI assistance.