Looking at recent major central bank policy meetings through the lens of the currency market, hedge funds have made a resounding verdict: do not underestimate the strength of the US dollar.
According to the latest data from the Commodity Futures Trading Commission (CFTC), speculators are heavily favoring a stronger dollar, particularly against G10 currencies, with a notable focus on the Japanese yen and Swiss franc. Figures for the week ending March 26 reveal that speculative CFTC accounts have significantly increased their net long dollar position against both G10 and emerging currencies, reaching $13.5 billion, the highest level since September 2022.
The net long position against G10 currencies is even more pronounced at $17.64 billion, a level not seen since July 2022. This surge in positions has largely occurred in recent weeks, coinciding with policy meetings held by major central banks including the Federal Reserve, European Central Bank (ECB), Bank of Japan (BOJ), and Swiss National Bank (SNB).
From a perspective of relative interest rates, the dollar has emerged as the clear winner. The Federal Reserve’s decision to raise its median ‘dot plot’ and long-run neutral rate projections, coupled with the BOJ’s perceived ‘dovish’ rate hike, ECB’s potential policy easing ahead of the Fed, and SNB’s rate cut, have all contributed to the dollar’s appeal.
Even those who hold a more pessimistic view of the dollar’s long-term prospects acknowledge its attractiveness in the short term. Jonathan Peterson, senior economist at Capital Economics, noted that while the bar is high for a substantial dollar boost, continued economic resilience in the US could keep the greenback on a strong trajectory in the near term.
Speculators are reflecting this sentiment in their positioning. Hedge funds have significantly increased their net short yen position, nearing levels not seen since February, which was the largest bet against the yen in over six years. This renewed bearishness has contributed to the yen hitting a 34-year low against the dollar.
Similarly, hedge funds have grown their net short Swiss franc position to the largest in almost five years, indicating a substantial bet against the Swiss currency. Meanwhile, their net long euro position has dwindled, signaling reduced confidence in the euro’s appreciation potential.
In essence, the verdict from hedge funds on recent central bank policy meetings is clear: the US dollar is king in the current currency market landscape, and investors are not hesitating to align their positions accordingly.