How Wall Street’s Richest Hedge Funds Are Quietly Betting Against the Dollar

When something intriguing is taking place on a trading floor, a certain silence descends. A focused quiet, with phones held to ears, eyes on screens, and the occasional muttered confirmation, rather than the boisterous, theatrical kind of trading you see in movies. The foreign exchange desks at the larger banks have sounded like that, according to multiple reports from the last two weeks. The so-called “smart money” has been busy doing something it hardly ever does in public. It has been moving away from the dollar.

The figures are not nuanced. The demand for euro calls, which are contracts that pay out when the euro strengthens, outpaced puts by about thirty percent last Friday alone, and trading volume in euro-dollar options increased by almost sixty percent. Call volumes exceeded puts by half in the Australian dollar, which is frequently used as a kind of mood ring for global risk appetite. These are not the cautious trades that a pension fund might make in the manner of hedging. To anyone observing, they appear to be conviction.

Hedge funds and real-money clients have been pursuing bearish dollar bets across most G10 pairs in the last 48 hours, according to Jian Cao, who oversees FX options globally for RBC Capital Markets out of Toronto. Speaking with people in the market gives me the impression that this has been developing for some time. The Bloomberg Dollar Index’s 1.9 percent drop in April is not a crash. It’s a more subdued phenomenon that occurs in the options pits before it manifests elsewhere: a gradual erosion of trust in the global reserve currency.

The low cost of the wager is one of the things that makes this moment unique. For the majority of currency pairs, implied volatility—the number that determines an option’s price—is low. According to Cao, this has made it affordable for funds to use put spreads, which cap upside but are less expensive up front, or to just purchase dollar puts outright. The market usually takes notice when something becomes cheap to short and those with the best information begin to do so.

The positioning may be so intriguing because the macro image is not straightforward. Negotiations are anticipated before the current agreement expires, as the United States and Iran move closer to a longer-term ceasefire. Additionally, traders are keeping a close eye on Kevin Warsh’s confirmation hearing for the position of Federal Reserve Chair. Some of the dollar selling may be the result of wagers on what a Fed led by Warsh might do. Alternatively, the funds may simply believe that the structural narrative of the dollar has collapsed.

Fund flows have obviously changed, according to Sagar Sambrani of Nomura International in London, with the euro, Australian dollar, and Canadian dollar emerging as the preferred alternatives. David Einhorn, who is not prone to exaggeration, even went so far as to claim that gold was turning into the reserve asset earlier this year. Even though no one wants to say it aloud, it’s difficult not to sense that something fundamental is changing as this develops.

Nobody truly knows what will happen next. Currencies move gradually at first, then suddenly. The hedge funds have made their bets. We’re all just listening to the tape.