Hedge funds are madly in love with the US dollar

Hedge funds appear to love the dollar.

A Societe Generale research note analysing hedge funds holdings based on CFTC data illustrates that funds are very long on the US dollar against other currencies. They write,

“Long dollar / short euro positions have reached unprecedented levels, beating the June 2012 record. There is some reason to feel at least slightly ill at ease by the extreme levels that have now been reached (almost three standard deviations away from historical net positions, see chart below). Given diverging monetary policy across the Atlantic, it seems fair to expect that volatility in the foreign exchange markets will continue.”

This chart, from the research note, shows hedge funds’ net currency positions relative to their historical averages, measured in standard deviations. For most of the currencies that Societe Generale considered — the Mexican peso, the Australian dollar, the Canadian dollar, the Brazilian real, and the British pound — funds have historically high net positions in the dollar against those currencies. This is especially true for the euro, which, as noted above, is very far from the historical average.

It’s only the Swiss franc where the balance of those positions are flipped.

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