Since the Fed restarted QE in March, the dollar has continued to fall. In July, the U.S. dollar index tumbled 4.4%, the largest monthly decline in the past 10 years, and fell to a new low in more than two years last week. But recently, many hedge funds have begun closing short positions in the US dollar and issued warnings about short-squeezing.

“Selling the U.S. dollar is becoming very crowded,” said Nader Naeimi, head of dynamic markets at AMP in Sydney. “Risks may emerge at any time, and the U.S. dollar has room for repositioning.”

BlueBay Asset Management, which manages more than $60 billion in assets, has already profited from its short US dollar position, and AMP Capital has reduced its long position in emerging market currencies. In addition, K2 Asset Management Ltd. (K2 Asset Management Ltd.) is also reducing its risk exposure, partly because of concerns about a sudden rebound in the dollar.

Over the past four months, the U.S. dollar has been falling against other G10 currencies, and the bet on shorting the U.S. dollar has reached a two-year high. At the end of July, leveraged funds bought large amounts of Japanese yen, and net long euros for the first time in the following two years.

The dollar’s short-term rebound risk increases

Although no hedge fund expects the dollar to return to strength, they pointed out that the risk of a short-term rebound in the dollar is increasing.

George Boubouras, head of K2 asset research, said that too much volatility may cause the dollar to rebound sharply in the short term. This can be painful, especially for emerging markets that have been hit by a strong dollar.

Another driving factor may come from the escalation of geographical tensions, which often trigger market volatility and safe-haven buying.

August often marks the beginning of seasonal capital flows, which tend to benefit the dollar. A measure of the strength of the U.S. dollar shows that in the past 10 years, the U.S. dollar tends to appreciate from August to November, with an average appreciation of 3% in the quarter before the past seven U.S. elections.

BlueBay Chief Investment Officer Mark Dowding said, “After the market has achieved strong returns for several consecutive months, it is reasonable for the risk to be flat in August. We were short the U.S. dollar, but have now turned neutral after locking in profits.”

The US dollar is still bearish in the medium and long term

In the medium and long term, institutions are still biased towards the dollar. For them, any rebound in the dollar is short-lived and will also be a good opportunity to place more short bets.

Citi believes that with the passage of time, based on factors such as valuation, a huge trade deficit, and the Fed’s willingness to provide an unlimited amount of cheap dollars to the global monetary system, it is natural for the dollar to fall.

At present, the economic growth momentum in Europe is better than that in the United States. If this momentum continues, investors must prepare for the end of “American economic exceptionalism”.

David Ward, managing director of Golden Horse Fund Management Pte., is optimistic about the euro. He said, “The obvious risk lies in a sharp market correction or tail event, such as a stronger-than-expected US economic recovery. But the possibility of such a recovery in the short term seems to be getting smaller and smaller.”