Hedge Funds Cut Dollar Longs on Sign Fed Hikes Are Still Distant

(Bloomberg) -- Hedge funds’ bullishness toward the dollar is starting to evaporate amid speculation the U.S. currency has risen too much given the Federal Reserve remains adamant it’s in no rush to raise interest rates.

Leveraged funds trimmed net long positions for a third straight week in the period through Nov. 16, having cut back their bullish bets by more than a quarter over that period, according to data from the Commodity Futures Trading Commission for eight currency pairs aggregated by Bloomberg.

Fed Chair Jerome Powell said earlier this month he won’t entertain any rate increases until the labor market improves further, even if inflation accelerates. He made the comments on the same day the central bank announced it would start to slow its $120 billion of monthly asset purchases.

“We aren’t in a situation where short-end yields and dollar will keep rising nonstop,” especially as the Fed has said it is cautious about rate hikes, said Hideki Shibata, senior rates and currencies strategist at Tokai Tokyo Research Institute Co. 

The Fed’s progress toward tapering has seen the Bloomberg Dollar Spot Index jump by almost 6% from its May low. The gauge, which tracks the greenback against 10 of its major peers, climbed to the highest since September 2020 last week as it completed a fourth week of gains.

Traders are awaiting minutes of the Fed’s November meeting due to be published Wednesday for further clues about the timing of any future tightening. Fed Vice Chairman Richard Clarida, Governor Christopher Waller and St. Louis Fed Bank President James Bullard all suggested last week the topic of a faster taper might be on the table at their December policy meeting.

A breakdown of last week’s data shows the overall reduction in dollar longs was mainly driven by a decrease in bullish bets on the greenback against the Canadian dollar, the Australian dollar, and the Swiss franc. At the same time, hedge funds increased long position on the U.S. currency versus the pound.

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