Hedge funds have been reducing their exposure to the U.S. dollar, according to trading metrics compiled by Morgan Stanley. The bank's proprietary model shows an increase in bearish dollar positions through April 10, signaling a pullback from the safe-haven flows that powered the currency's recent rally.
That rally was pronounced in March, when the Bloomberg dollar index climbed 2.4% - its largest monthly gain since July - as investors sought refuge amid heightened geopolitical tensions. However, in April the index has weakened, falling 1.8% and recording a seven-day losing streak through Tuesday.
The latest downward pressure on the dollar coincides with the start of discussions between the U.S. and Iran aimed at resolving what the market has viewed as a six-week conflict. Market participants and Morgan Stanley's trading model indicate hedge funds have responded by increasing short-dollar bets as the prospect of a de-escalation grows.
"The path to a weaker dollar is widening, not narrowing," Morgan Stanley analysts Molly Nickolin, David Adams and Andrew Watrous wrote in a research report published Tuesday.
In their note, the analysts cautioned that while a ceasefire could lift risk-sensitive currencies in the near term, any medium-term dollar weakness is likely to be most pronounced against major currencies including the euro, the yen and the Swiss franc. That suggests currency moves may be concentrated against developed-market peers rather than uniformly across all emerging market or commodity currencies.
Investors monitoring currency markets and cross-border exposures should note the tactical shift in hedge fund positioning reflected in Morgan Stanley's data. The change in sentiment underscores how geopolitical developments can rapidly alter demand for safe-haven assets and reshape relative currency valuations over short horizons.
Context limitations: The details above reflect Morgan Stanley's proprietary trading model through April 10 and the analysts' report published Tuesday. The report and the trading data are the bases for the observations reported here.