Speculators in International Monetary Market futures slashed their net long dollar position by 80 percent, data released on Friday showed, coinciding with year-end profit-taking and a wholesale squaring up of portfolios.
Investors for the week ended December 20 dramatically pared their long dollar positions measured against the yen, euro, British pound, Swiss franc, Canadian dollar and Australian dollar to a net 7,840 contracts from 44,378 contracts in the prior week, according to data from the Chicago Commodity Futures Trading Commission.
One of the key reversals in the data was the net yen short position, which was cut to 26,105 contracts from a record 72,063 contracts in the previous week.
"The dramatic adjustment in the yen positioning is probably the key takeaway from this story," said Richard Franulovich, senior currency strategist with Westpac Bank.
"It is one of the biggest weekly adjustments we have seen and is outside the bounds of normal market adjustment," he added.
The data capture the dollar's largest weekly decline against the yen in six years, initiated by a large-scale unwinding of carry trades in which investors borrow in low-yielding currencies to invest in high-yielding ones.
"Carry is going to continue to dog the yen and therefore it will remain an attractive vehicle to fund carry positions out of," Franulovich said.
The dollar fell to a six-week low of 115.50 yen from around 120.50 yen, the steepest weekly fall since December 1999.
Another key reversal, which actually boosted the overall net long dollar position, was in Australian dollar positioning.
Investors axed their net long Australian dollar position to 7,909 contracts from 20,282 contracts.
Being "short" a currency is effectively a bet that it will weaken, while "long" positions are bets that a currency will appreciate.
The data from the CFTC's Commitments of Traders report on speculative positioning is used by analysts as an indicator of future market direction.
For example, extreme net short speculative positions often suggest a rebound in the currency is imminent because dealers might be uneasy about keeping such a large position open. Similarly, extreme net long positions can suggest a currency has already appreciated a great deal and is poised for a correction lower because dealers are ready to lock in profits.
Investors also flipped from a small net short euro position to a modest net long position.