Dollar Bears Add to Bets as Treasury Yield Push Accelerates Hedge Fund Selling
Summary
- The report said bets on dollar weakness have expanded after the U.S. Treasury stepped up market intervention aimed at lowering long-term Treasury yields.
- It said hedge funds increased short-dollar positions, while premiums in the options market to guard against further dollar declines climbed to the highest level since February.
- In Asian markets, demand has been concentrated in short-term options and volatility trades tied to the Korean won, Thai baht, Singapore dollar and offshore yuan.
Forecast Trend Report by Period
Hedge funds are ramping up bets against the dollar as the U.S. Treasury steps up efforts to lower long-term borrowing costs.
Bloomberg reported on Aug. 24 that hedge funds have been adding to short-dollar positions ahead of additional fiscal measures Treasury Secretary Scott Bessent has signaled to ease borrowing costs. The dollar posted its biggest one-day drop in nearly three weeks after Bessent said on Aug. 19 that the Treasury would at least double the size of its long-term bond buybacks.
Markets are watching the risk that confidence in the dollar could erode if the Treasury intensifies efforts to directly manage bond yields. Bessent has described the approach as a “Treasury twist,” using the term for a strategy of increasing short-term bill issuance rather than buying long-dated Treasuries to reduce long-term borrowing costs.
Dollar selling has been most pronounced among hedge funds. “Dollar supply persisted throughout August, and selling by hedge fund clients in particular accelerated clearly,” Torsten Schoenborn, co-head of G-10 foreign-exchange trading at Barclays, said. By contrast, so-called real money investors with longer-term mandates have yet to show a clear direction.
Options markets are also showing stronger demand for protection against further dollar weakness. Data compiled by Bloomberg show the premium paid over the next month for options positioned for dollar declines rather than gains rose to the highest level since February. On Aug. 21, demand for dollar put options against the euro was 47% higher than for calls.
Demand to hedge against dollar downside has spread across the foreign-exchange options market since the Treasury’s buyback announcement, Akshay Saxena, Citigroup’s head of Asia foreign-exchange options trading, said. In Asia, demand for short-term options has centered on the Korean won, Thai baht and Singapore dollar, while investor interest has also increased in volatility trades linked to the offshore yuan.
Suehyeon Lee
shlee@bloomingbit.ioI'm reporter Suehyeon Lee, your Web3 Moderator.