Hedge Funds Ramp Up Dollar Short Bets as Betts Expands Long-Term Bond Buybacks, Sparking Confidence Crisis

As markets await U.S. Treasury Secretary Janet Yellen’s announcement of new fiscal plan details amid borrowing costs at multi-decade highs, hedge funds are significantly ramping up short bets against the dollar.

On Wednesday (19th), Yellen announced that the U.S. Treasury would 'at least double' its buyback program for 10- to 30-year Treasury bonds. The dollar responded sharply, recording its largest single-day drop in nearly three weeks, sparking a wave of selling in the spot market. On Monday (24th), Asian forex markets opened with little movement.

Torsten Schöneborn, Co-Head of G10 Currency Trading at Barclays Bank, noted that hedge funds have reacted particularly strongly in linear FX trading, continuing the dollar-selling pressure observed since August.

Investors fear that the Treasury’s aggressive measures to suppress long-end interest rates amount to administrative distortion of market pricing, which could ultimately erode market confidence in the dollar.

Meanwhile, options markets are also signaling pessimism: the premium for protection against a dollar decline over the next month has risen to its highest level since February.

Akshay Saxena, Head of FX Options for Asia-Pacific at Citigroup, stated that demand for hedging against dollar downside risk has clearly broadened since the long-bond buyback plan was announced. Yellen’s 'yield management' approach is pushing the Treasury into a role traditionally held by the Federal Reserve (Fed), potentially at the cost of further diminishing the dollar’s status as the world’s premier reserve currency.