Bond traders, hedge funds, and global macro strategists have ramped up bets against the U.S. dollar in recent weeks, a move that’s about to shake currency markets. As the wave of “short dollar” positioning grows, it’s raising fresh warnings about volatility, not just in forex but across equities, bonds, commodities, and crypto.

Why are traders taking out short dollar positions?

Shorting the dollar means speculators are betting its value will decline relative to other major currencies. It’s a trend that has picked up steam in September, fueled by expectations that the Federal Reserve is near the end of its tightening cycle and may soon pivot to further interest rate cuts.

Fiscal deficits, talk of dedollarization in global trade, and capital flows into assets like gold and emerging market currencies have all put pressure on the greenback.

Hedge funds and institutional investors have piled into the short dollar trade, supported by recent macro headlines suggesting U.S. growth could stall while other regions like Europe and Asia show surprising resilience. This is reflected in increased derivative volumes and crowded short positions, often highlighted in financial commentary and market data.

Why volatility may be looming

Large, one-sided positioning can create unstable market conditions. When many traders bet against the dollar at once, even a small reversal (like surprisingly strong U.S. payrolls or inflation data) can trigger a rapid “short squeeze.” This forces traders to buy back dollars quickly and drives prices sharply higher. As Bank of America’s Michael Hartnett told Zero Hedge, “buckle up” if there is a disorderly unwind of the short dollar trade.

This kind of move doesn’t just affect currency markets. U.S. equities and global markets can see sudden capital flows as currency hedges are unwound. Treasury yields may swing as risk sentiment and safe-haven demand shift. Gold

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Author: Christina Comben