By Jamie McGeever

ORLANDO (Reuters) – Long dollars are bound to become an overcrowded trade eventually. A reversal may follow, but hedge funds have no other options.

The largest wager made by funds in six months was that the dollar would strengthen against major currencies around the globe. You will understand.

The greenback’s rise to an unprecedented 20-year high is due to many factors, including a wider interest rate spread and favorable relative growth prospects as well as safe-haven flows in the face of exploding market volatility and equity- or crypto-fueled markets.

Recent data from Commodity futures Trading Commission shows that funds’ net long dollars against G10 currencies increased to $20.6 Billion in week to May 10, compared to $19.8 Billion the week prior.

It is also the largest net position in long since late December 2013. This bullishness can be broadened – the funds have long dollars in all major currencies, but not the euro. However, that short position seems very small compared to historical norms.

The long-term position in an asset, security or other investment is basically a bet on the value of that asset. While a short position can also mean that you are betting it will increase in value in the future, a shorter position could indicate the exact opposite.

Graphic: CFTC dollar positions & https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezgwlvw/USDCFTC.jpg

Graphic: CFTC net dollar position & dollar index https://fingfx.thomsonreuters.com/gfx/mkt/zgpomewrzpd/USDCFTC2.jpg

The dollar index, a measure of the greenback’s value against a basket of major currencies, rose above 104.00 on May 9 for the first time since December 2002, lifted by the Federal Reserve’s half-percentage-point rate hike and a pledge from Fed Chair Jerome Powell that further 50-basis-point moves are coming.

$6 BILLION BET AGAINST STERLING

Goldman Sachs analysts (NYSE:) believe that the dollar has been overvalued 18%. However, they are cautious in calling for a correction. Analysts at Barclays (LON) Note that while the dollar may appear stretched, forecasters have raised their expectations regardless.

Barclays posted Monday that “More costly for longer”

While there’s much to debate over how tighten the Fed, it is widely believed that the Fed will continue to act aggressively than its peers. The terminal rate implied in pricing for the Secured Overnight Funding Rate (SOFR), which was almost 3.50% at May 4th, when the Fed made its policy decision, has now fallen to 3%.

The Bank of England, for example, raised interest rates this month but also warned of the risks of recession and double-digit inflation. It was not the message Sterling wanted, and sterling’s downdraft took off quickly.

CFTC funds are consistently short the pound every week since November, except for the week prior to Russia’s invasion of Ukraine in February. Since then, they have been short the pound every week. That bet now stands at more than $6Billion. On Friday, sterling reached a 2-year low of $1.2155.

Graphic: CFTC sterling positions https://fingfx.thomsonreuters.com/gfx/mkt/akvezrgajpr/CFTCGBP.jpg

Although the European Central Bank has been directing markets toward a rate increase in July, their hawkish sounds are drowned by the recession alarms. Officials at the ECB are starting to be concerned by the euro’s descent towards parity with US dollars.

In the last week’s CFTC fund flipback of long euros, a weekly position swing that was almost $3Bn. However, those longs were crushed by the currency slump down to $1.0350.

Derek Halpenny from MUFG thinks that the euro’s 2017 lowest of $1.0340 represents the final line of defense prior to $1.00, and is now at parity for the first time since 2002. Hedge funds may be thinking in the same way and could soon flip to a net short position on euro if they are following this trend.

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(These opinions are the views of the columnist at Reuters.

(By Jamie McGeever. Graphics: Joice Alves, Karen Brettell, Saikat Chatterjee. Editing by Paul Simao.