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Hedge Funds Bearish On US Dollar

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hedge funds bearish on the dollar

After going on two years of the majority of hedge funds being bullish regarding the US dollar, investors have switched to a more bearish outlook. This situation was last seen back in July of 2014.

Since then, hedge funds have predominantly been betting on the dollar rather than against it. Now the opposite is true, with more hedge funds acting on the opinion that the US dollar is decreasing in value and adjusting their strategies accordingly.

Bulls and Bears: A Definition

For those unfamiliar with the terms, bullish investors are those who feel optimistic about a market or stock. On the flip side, an investor is bearish when they think the value is set to drop.

This influences decisions regarding buying and selling investments, with bears aiming to profit from the falling prices. Bulls, on the other hand, manage their investments with the expectation of riding the rising value to turn a profit.

Opinions on the direction the value of a market or security is taking can switch quickly, with the same investor being alternately bearish and bullish depending on the current situation.

Whether an investor is bearish or bullish about a particular speculation varies depending on a suite of economic and social factors. Different investors draw different conclusions about an investment from the same inputs.

At present, hedge funds have become more bearish on the dollar. However, at the same time, the ‘real money’ investors are still bullish. Pension funds, asset management companies and similar investors think that investing in the US dollar is still likely to turn a profit.

How Things Stand Now

In the trading week ending 19th April, positions that benefited from an increase in the value of the US currency were outweighed by those that would profit from losses by over 21,500 contracts. It’s the first time since July 2014 that this has been the case.


Since 2014, buying into the US dollar has been the winning trade, with an increase in value of over 20 percent up to 2016.

During this time, interest rates and inflation affected the value of investing in the dollar. At the same time, quantitative easing by other major world economic powers – notably Europe, China and Japan – weakened competition from these rival currencies.

All this made the US dollar a promising investment for hedge funds, with a generally bullish outlook, for two years and more.

Currently, such bullish investments have been cut at such a rate that if the trend continues, no such positive bets on the dollar will remain by the end of the month. This seems to signal the end of the two-year surge against other currencies.

At present, chances are three to one that the increase in value compared to the Euro will stop in 2016. The two-year trend is even less likely to persist against the yen, with one-in-ten likelihood.

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What Prompted The Change?

The shift comes on the tail of cuts to forecasts by the U.S. central bank last month. As a result of a slowing economy, their predictions for growth and inflation were cut, with a higher bar set for future interest rate rises.

In December 2015, the Federal Reserve estimated that the midpoint of the federal funds rate range would be at 1.375 percent at the end of 2016. In March, this estimate had dropped to 0.875 percent.

Back in March, the Bloomberg Dollar Spot Index dropped by drastic 3.9 percent. This is the largest drop in a single month since 2010. In the past week, the Index recorded the dollar rising in value compared to 10 other currencies considered comparable peers by 0.4 percent.

Despite gains such as this, overall the index has fallen by 4 percent this year.

Looking Forward

Predicting the changes in outlook is always a tricky business, as the value of different markets will be affected by a host of interrelated factors. However, futures traders are reasonably certain that central bank rates will increase by December.

In fact, despite the current downturn, the confidence of such a move has increased by 13 percent in the last week. The current consensus is that there is a 63 percent probability that this hike will occur, compared to the calculated estimate of 50 percent just seven days before.

It has been suggested that the current bearish outlook is short-sighted, with some investors expecting adjustments to monetary policy by the Fed as the economy strengthens and weakening of currencies in other countries. In the long term, this would make the US dollar a wise investment, despite a temporary dip in value.

Changes such as this to the value of the US dollar will lead to re-evaluation by hedge funds, possibly precipitating a shift back to a bullish outlook. For now, however, the consensus seems to be that profits are to be made by betting against the US dollar rather than being on it.

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