Hedge funds up dollar shorts as investors weigh Bessent’s fiscal strategy

Hedge funds are increasing bearish positions against the US dollar as investors evaluate Treasury Secretary Scott Bessent's plan to curb high borrowing costs and control the government's debt, according to Bloomberg. Selling of the greenback surged last week following Bessent's announcement that the Treasury would double its purchases of longer-term US bonds via a buyback program.

This move pushed the dollar to its steepest one-day drop in nearly three weeks, triggering broader selling across currency markets. Although the dollar remained flat in Asian trading on Monday, positioning data and options market activity suggest investors are growing increasingly worried about the dollar's future. Bessent's strategy has sparked speculation that the Treasury may assume a more direct role in managing US interest rates.

Critics of this approach argue that greater involvement in the bond market could erode confidence in the dollar. Bessent has dubbed this tactic a "Treasury twist," involving the Treasury's purchase of longer-dated debt while issuing more short-term securities to alleviate pressure on the longer end of the Treasury curve, where borrowing costs have remained high.

This potential for a more active Treasury role is also reflected in the foreign-exchange options market, with the cost of protecting against a dollar decline over the next month reaching its highest level since February. The shift has been especially notable in Swiss franc options, with one-month implied volatility soaring to its highest level in over two weeks last week.

Volatility for the euro, pound, and Canadian dollar has also climbed as institutional investors turn to structures that benefit from a weaker US currency. The bias towards bearishness is further evident in options positioning, where demand for dollar put options against the euro surged by 47% compared to demand for dollar calls on August 21, based on Depository Trust and Clearing Corporation data for contracts worth at least $150 million.

In Asia, attention has focused on shorter-dated options involving the Korean won, Thai baht, and Singapore dollar, while offshore yuan options have also seen increased interest as the currency pair trades near multi-year lows.