Hedge funds are becoming more negative on the US dollar, with investors increasingly positioning for further weakness as expectations rise around a potential extension of a ceasefire between the US and Iran, which has reduced war-related demand for the currency, according to a report by Bloomberg.
The report cites a proprietary model from Morgan Stanley as showing that investors added to short-dollar positions through 10 April, reflecting a gradual shift in sentiment after months of geopolitical support for the greenback.
Derivatives pricing also points to a cooling in bullish dollar exposure. Risk reversal indicators on the Bloomberg dollar index show the premium for hedging against dollar strength has narrowed to levels last seen in late February, while options markets suggest positioning has moved closer to neutral from heavily bullish levels just a month earlier, according to a Goldman Sachs research note dated 15 April.
Market participants say hedge funds have been using short-term rallies to build bearish exposure rather than chasing weakness. Ivan Stamenovic, head of Asia Pacific G-10 FX trading at Bank of America in Hong Kong, said funds have been “selling into strength” as volatility provides opportunities to fade dollar gains.
The dollar’s recent trajectory has reversed sharply. Bloomberg’s dollar index rose 2.4% in March, its strongest monthly performance since mid-2023, as conflict-related safe-haven demand supported the currency during heightened Middle East tensions. However, the index has since fallen 1.9% in April, including its longest losing streak since 2020, as expectations of diplomatic progress between Washington and Tehran gained traction.
Options activity has mirrored the shift. Trading in euro-dollar call options significantly outpaced put activity this week, indicating increased positioning for euro strength against the dollar. Market data from the Depository Trust & Clearing Corporation also shows a rise in larger block trades linked to euro upside strategies.
Analysts at Morgan Stanley said the recent price action reflects a broader willingness among investors to fade dollar strength, arguing that near-term geopolitical de-escalation could extend downside pressure on the currency. While a ceasefire may support risk-sensitive currencies in the short term, they noted that medium-term dollar weakness is likely to remain concentrated against major peers such as the euro, yen, and Swiss franc.
Sentiment toward the dollar has also been influenced by broader structural concerns. Kenneth Rogoff, former chief economist at the International Monetary Fund, said the currency remains significantly overvalued and warned that geopolitical shifts could accelerate diversification away from the dollar in global markets.
The turning point in positioning appears to have followed early signs of diplomatic progress between the US and Iran. Market participants noted that an initial ceasefire announcement triggered a sharp intraday decline in the dollar index, as investors unwound long-dollar positions built during the conflict.
Some strategists say the market is now increasingly focused on longer-term implications of reduced geopolitical risk premiums. According to traders at major banks, hedge funds and asset managers have been scaling back defensive dollar positions and shifting toward trades that benefit from stabilising global risk sentiment.
While uncertainty around the conflict remains, several banks warn that the dollar may struggle to regain its earlier strength if geopolitical tensions continue to ease. JPMorgan analysts suggested that the currency could revisit earlier lows if de-escalation holds and macro drivers reassert themselves.
