Hedge Funds Flock Back to Dollar as Treasury Yields Surge

Hedge funds and other speculators staged a sharp comeback in their aggregate dollar longs during the week to September 22, as surging US Treasury yields and renewed Federal Reserve tightening expectations restored the dollar's carry appeal.

The Commitment of Traders report showed that after seven consecutive weeks spent dismantling a record dollar long, investors rapidly rebuilt exposure. The combined dollar long jumped to $18.4 billion, up from just $5.9 billion at the end of July. This shift reflected a renewed widening of the dollar's yield advantage following the Federal Reserve's latest 25-basis-point rate hike and increasingly hawkish expectations for the policy outlook.

The yen suffered the biggest positioning reversal as rising US yields outweighed the impact of the Bank of Japan's rate hike to 1.25%. The dollar buying was concentrated against the euro, which saw net selling of 25.3k contracts, equivalent to $3.6 billion. Sterling positions were also cut by 23.9k contracts, or around $2 billion.

In commodities, the Bloomberg Commodity Index fell 1.8%, reversing some of its recent strong gains. The correction was led by energy, with WTI crude dropping around 10% and gasoil 9%. However, copper rebounded around 6% following a period of profit-taking, supported by persistent concerns about tight supply outside the US.