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Investing.com -- Last week’s stumble in the dollar wiped out a quarter of the gains seen from the end of the third quarter, leading many to question whether the bulls are pulling out, but BofA’s positioning data show that long bets on the greenback haven’t significantly declined from recent peaks.
"Around 70% of the [BofA] Hedge Funds’ USD position built over Q4 and around 75% via SDR FX options remain, in line with the price action," strategists from BofA said in a note.
The strategist pointed to various positioning indicators that suggest while some unwinding of dollar longs has occurred, a significant portion of the bullish bets built up in the fourth quarter of 2024 are still intact.
BofA’s proprietary data show that hedge fund clients have only unwound about 30% of their dollar long positions accumulated in Q4, with the peak of these positions reached in mid-December. Real money clients, on the other hand, have largely reversed their Q4 dollar demand, though the caveat is that their overall positioning was much lighter compared with other groups.
Recent positioning adjustment aligns with the price action seen in the dollar index. About 25% of the DXY’s maximum gains versus the end of Q3 were pared back by last Friday, consistent with the positioning changes observed across various indicators.
"We find last week’s positioning adjustment to be in line with the price action," BofA added, suggesting that the dollar’s recent weakness may not necessarily signal a broader trend reversal.
The remarks come as traders are closely watching for signs of a potential shift in dollar sentiment at time of fast-moving geopolitical developments and changing expectations on Federal Reserve policy.
Investor bets on Fed rate cuts have been reined in following recent data showing signs of sticky inflation at time when many worry that President Trump’s policies could further muddy the inflation outlook. The Fed kicked off its two-day meeting on Tuesday, which is widely expected to conclude with an unchanged decision on interest rates, leaving the spotlight on Fed chairman Jerome Powell’s press conference.