Commentary: Hedge funds bet their bottom dollar ... on the euro

Only twice before since the launch of the euro has the tide of fast money lifting the single currency and submerging the dollar been this strong.

The question now is whether the current trend continues and the euro sails higher, as it did in 2007, or reverses, as it did in 2011. So far, the indications are that it could be the former. 

Figures from the U.S. Commodity Futures Trading Commission (CFTC) show that hedge funds and other speculators now hold the biggest net long euro position since May 2011. The overall short dollar position is the largest in over three years. 

Traders are betting that the European Central Bank will soon begin phasing out its bond-buying quantitative easing programme, while expectations of another U.S. interest rate are fast evaporating. 

Net long euro positions rose to 96,309 contracts in the week to Tuesday, an increase of nearly 10,000 on the previous week. Barring a single week in May 2011 when net longs topped 99,000 contracts, that’s the highest since the first half of 2007.

Just over a decade ago euro long positions topped 100,000 contracts, reaching a record in May that year just below 120,000. The euro/dollar exchange rate went from around $1.36 up to what remains a record high above $1.60 in April 2008. 

It was a different story in 2011 when longs reached 99,500 contracts in May that year and the euro was nudging $1.45, a peak which has not been visited since. Indeed, the euro went on a multi-year decline that almost saw parity breached late last year. 

How will it play out this time around? Analysts at Swiss bank UBS note that the euro is currently enjoying its strongest rally against the dollar since 2009, up more than 15 percent from that December 2016 low. 

The euro’s winning streaks usually fizzle and turn once they reach the 10-15 percent mark. An exception was 2007, when a 10 percent rise was quickly followed by another 10 percent upswing.