ORLANDO, Florida - Hedge funds' bearish view on the dollar is evaporating fast and at the current pace of buying they will be outright bullish by the end of the month.
What's more, recent history suggests that when funds go long dollars, they tend to stay long for a while. 'Longer for longer', if you like.
The latest Commodity Futures Trading Commission (CFTC) data shows that funds cut their net short dollar position to $7.17 billion, the smallest bet against the dollar since mid-June and a third of what it was six weeks ago.
It has halved in the last two weeks, and at the current pace the speculative community will be net long of dollars by the end of the month. This shift has coincided with the dollar's rise to a six-month high against a basket of currencies.
A short position is essentially a wager an asset's price will fall, and a long position is a bet it will rise. Hedge funds often take directional bets on currencies, hoping to get on the right side of long-term trends.
This is broadly reflected in CFTC positioning cycles.
From May 2013 - when former Fed chief Ben Bernanke uttered his famous 'taper tantrum' remark - funds went net long dollars for an almost uninterrupted four-year stretch through June 2017, a bullish bet that peaked at a record $51 billion in late 2014.
That was followed by a year being net short dollars, nearly two years of being net long, before swinging back to being net long for over a year. Funds have been net short of dollars since November last year.
This suggests that although the dollar's short-covering rally may not have much juice left in it, the greenback could find a solid source of long-term demand once the speculative community decides to turn outright bullish.
Whether funds do will hinge largely on the interest rate outlook.
There is a growing view that the Federal Reserve's hiking cycle is over, which is intuitively negative for the dollar. But what matters is relative moves - changes in yields relative to current market pricing, and relative to other jurisdictions.
And that is a mixed picture, especially given the latest developments in Japan.
The two-year U.S.-Japanese yield spread remains around 500 basis points in favor of the dollar, around the widest level in over 20 years. A quicker tightening shift from the Bank of Japan than is currently priced in could move that dial rapidly.
CFTC data show that funds are still holding a substantial net short yen position worth around $8.2 bln. Given that funds have been net short the Japanese currency since March 2021, there is potential for the yen to snap sharply higher.
On the other hand, although CFTC funds cut their net long euro position to a seven-month low of 136,000 contracts, that is still a large $18 billion bet that the euro will appreciate.
If the European Central Bank brings its rate-hiking cycle to a premature end - not an unreasonable assumption as growth forecasts are slashed and Germany is seen falling into recession - there is plenty of scope for funds to liquidate their euro longs.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Writing by Jamie McGeever Editing by Christina Fincher)