Hedge Funds Increase Bearish Dollar Positions Amid Declining Haven Demand

Dollar Weakness Bets Surge as Hedge Funds Flock to Options

Hedge funds and other asset managers are significantly increasing their bets on dollar weakness using options, a sign that the market is moving further against the US currency as haven demand wanes. Trading in euro-dollar options jumped by nearly 60% on Friday, with demand for euro calls, which profit from gains in the shared currency, outpacing that of puts by about 30%.

The volume of call options on the Australian dollar, seen as a barometer of risk sentiment, was more than 50% that of puts on both Friday and Monday. The dollar slipped on Monday, extending its decline in April, as signs that the US and Iran are moving closer to a lasting ceasefire add to bearish sentiment toward the world's reserve currency.

Bloomberg's dollar index has slipped 1.9% this month as the US and Iran have managed to maintain a temporary ceasefire despite fruitless talks over a lasting peace. Traders are now waiting for the outcome of the next round of negotiations that are thought to take place before the current ceasefire expires.

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Implied volatility, a measure of expected future movement and a key factor in the price of options, has remained relatively low for most currency pairs despite uncertainties over the Middle East conflict. This low volatility makes buying outright US dollar put or put spreads very cheap, according to RBC Capital Markets. Put spreads limit potential gains from further declines but reduce upfront costs compared with standard, or outright, put options.

Trading in European markets also indicates funds are turning more bearish on the greenback. US-dollar-weaker flows have been in focus since the de-escalation in the Middle East, said Sagar Sambrani, a senior foreign-exchange options trader at Nomura International in London. The euro, Australian dollar, and Canadian dollar have been the preferred currencies for this play.

Foreign-exchange markets consolidated on Monday awaiting further developments from the Iran-US talks as well as Kevin Warsh's confirmation hearing for Federal Reserve chair, Sambrani said.

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