Bond traders, hedge funds and global macro strategists have stepped up their bets on the US dollar in recent weeks. As the wave of “short dollar” positioning grows, it raises new warnings about volatility, not just across forex, but also stocks, bonds, commodities and crypto.
Why are traders removing short dollar positions?
To shorten the dollar means that speculators are betting that its value will decrease compared to other major currencies. It’s a trend that regained steam in September, backed by expectations that the Federal Reserve is near the end of its tightening cycle, and may soon pivot towards further interest rate cuts.
The fiscal deficit, the talk of dedollarization in global trade, as well as capital flows to gold assets and emerging market currencies all put pressure on the greenback.
Hedge funds and institutional investors have accumulated in the short dollar trade supported by recent macro headlines. This suggests that while other regions like Europe and Asia have shown remarkable resilience, US growth could stall. This is reflected in the volume of derivatives and the increased number of crowded short positions, often highlighted in financial commentary and market data.
Why Volatility is Coming
Large, one-sided positioning can create unstable market conditions. Even small reversals (such as surprisingly strong US pay and inflation data) can cause a quick “short aperture” when many traders bet on the dollar at once. This will require traders to quickly buy back the dollar, increasing prices sharply. As Bank of America’s Michael Hartnett told Zero Hedge, if there’s a chaotic and unrestrained relaxation of the short dollar trade, “buckle up.”
This type of movement does not only affect the currency market. US stocks and global markets can see sudden capital flows as currency hedges are unwinding. Treasury yields could swing as a change in risk sentiment or safe demand. Gold and oil prices can react violently to the strength and weakness of the dollar, and strong US dollars often lower crypto prices and vice versa.
However, the dollar has become weaker, losing 10% of this year’s value, but recorded intermittent profits when economic news went positive. Round-trip means a sharp swing for investors as positions are rewinded or reversed.
Crowded trade, sharp reversal
The risk of a busy short is that too many traders end up on the same side of their bet. If circumstances change, the exits will narrow and lead to major movements that will ripple through global financial markets.
Some analysts warn that markets have little buffered against unexpected policy changes, surprises in economic data, or geopolitical shocks. The question isn’t just whether the dollar will continue to slip. That’s what happens when everyone is rushing to the same exit.
What to see
With short dollar trading dominating for now, investors are everywhere watching the decisions on future Fed signals and interest rates. Releases of US economic data (salaries, inflation, GDP), political and fiscal headlines including risk of government shutdowns, and unexpected global events could also update demand for dollar security.
While this trade remains a favorite heading into the fourth quarter of 2025, history shows that busy positioning could become a bumpy ride in the future. Volatility is not possible. Perhaps investors need to be prepared for big moves in both directions.