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Betting against the dollar has been the favorite trade of 2025 in the $9.6 trillion-a-day foreign exchange market, but that gamble is being crushed as the greenback climbs to a two-month high.
Even while the US government shutdown stretches on, traders across Asia and Europe said hedge funds are scrambling into options that predict the rebound will last into year-end, according to Bloomberg.
The sudden strength is being fueled by the sharp drop in the euro and yen, combined with warnings from Federal Reserve officials who want to slow down talk of more rate cuts.
Goldman Sachs, JPMorgan, and Morgan Stanley are still calling for the dollar to weaken, but every new rally turns those positions into costly errors.
If this strength continues, it could ripple across the world, making it harder for central banks outside the US to ease policy, raising the price of commodities, and straining borrowers with foreign debts in the US currency. It could also hit emerging-market stocks and bonds that were among the most popular bets of the year, while dragging down shares of American exporters.
Hedge funds struggle with rebound
Portfolio manager Ed Al-Hussainy of Columbia Threadneedle is one of the investors who switched sides. Ed went short in late 2024 when the dollar was still rallying under the so-called Trump trade following the US election.
Over the last six weeks, he trimmed that stance, pulling back exposure to emerging markets. “We have become a lot more positive on the dollar,” Ed said. “The markets have priced in a very aggressive series of cuts, and it’s going to be difficult to execute them without a lot more labor-market pain.”
The Bloomberg Dollar Spot Index has climbed about 2% since mid-year after suffering its steepest first-half drop in decades. It added 1.2% this week, the best performance in nearly a year.
Earlier in 2025, the greenback sank after President Donald Trump delayed sweeping tariffs when he entered office, with traders convinced inflation would stay low enough for the Fed to resume cutting rates.
But that slump deepened in April when Trump unleashed broad levies, sparking fears foreign investors would flee and reviving speculation that the White House favored a weaker dollar to help exporters.
Those fears never materialized. International buyers kept coming, lured by US tech giants leading stock market gains, while demand at Treasury auctions stayed firm.
Yet Commodity Futures Trading Commission figures still show hedge funds, asset managers, and commodity advisers shorting the currency late September. Though positions have dropped from their mid-year peak, there is still plenty of exposure left to crush if the rebound stretches further. Mukund Daga, global head of currency options at Barclays, said hedge funds are loading up on bullish option trades against most Group-of-10 currencies.
Options markets reveal just how aggressive the swing has become. Traders are paying more to protect against a dollar rally than a decline. Depository Trust & Clearing Corp. numbers show the appetite for bullish bets has outpaced bearish ones every single day this week, reaching the highest level of optimism since April. Technical charts back that move, with the greenback edging toward key resistance points.
Political stress fuels currency moves
The Federal Reserve will decide much of what happens next. Traders are pricing in two quarter-point cuts by the end of this year and more for 2026. Still, the September meeting minutes and public remarks show policymakers are far from convinced.
Inflation remains sticky even as the job market starts cooling. If weakness shows up, the short trade could revive, and some of Wall Street’s biggest banks are still betting on new dollar losses.
Another angle comes from the debasement trade, as fiscal fears in major economies push investors toward crypto and gold as alternatives to traditional currencies.
Earlier in the year, the bearish wave grew on hopes non-US markets would attract new capital. That story unraveled with politics in Japan and France.
In Tokyo, the likely rise of Sanae Takaichi as prime minister brought expectations of debt-funded stimulus and rising inflation, leaving the yen at its weakest since February. In Paris, Emmanuel Macron faced a political crisis that drove the euro to its lowest level since August.
Against this backdrop, strategists say the dollar’s rally against both currencies could last.
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