Speculators this week slashed net long bets on the US dollar to their lowest since mid-May last year, and boosted Japanese yen net short bets to their largest since mid-March, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
The value of the dollar's net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, fell to $62.5 million in the week ended July 11. Net long bets on the US dollar were at $135 million the previous week.
In a wider measure of dollar positioning that includes net futures contracts in the New Zealand dollar, Mexican peso, Brazilian real, and Russian ruble, the US dollar posted a net short position valued at $4.78 billion, the largest since May 2016.
"The dollar has continued to lose steam here from a speculative perspective," said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto. The dollar fell against a basket of major currencies this week to a near 10-month low after disappointing data supported the caution raised this week by several policymakers, including Fed Chair Janet Yellen about the softening in inflation since February.
On Friday, traders reduced their view the Fed would raise rates again before year-end. Traders are likely to have turned more bearish on the dollar, following this week's developments, Schamotta said.
Japanese yen net shorts, meanwhile, grew to their largest since mid-March, with 112,125 contracts, CFTC data showed. "What you are looking at is that the carry trade is back," Schamotta said, referring to investors borrowing at low rates in one currency to invest in another with higher returns.
Speculators are borrowing yen and investing in high-yielding currencies such as the Aussie, the kiwi, the Canadian dollar and the Mexican peso, thereby creating selling pressure on the yen and boosting higher yielding currencies. "You will continue to see this divergence for probably the next few months," Schamotta said.