Ceasefire negotiations have turned into a sell-off catalyzed by hedge funds shifting towards betting on a weakening US dollar.

Due to the prospect of the US and Iran restarting negotiations and possibly reaching a peace agreement weakening the strength of the US dollar generated by war, hedge funds are increasingly bearish on the US dollar. According to Morgan Stanley's proprietary trading model, investors increased their bearish US dollar trades during the period ending April 10th of this month. In the options market, the so-called Risk Reversal Indicator for the US dollar index shows that the premium for hedging against a strong US dollar and the premium for hedging against a weak US dollar have narrowed this month. Ivan Stamenovic, head of G10 currency trading at Bank of America in Hong Kong, said, "From what we are currently seeing, the hedge fund community is taking advantage of market volatility to short the US dollar, selling on rallies instead of buying on dips." The speed of the US dollar's rebound is astonishing. The Bloomberg Dollar Index rose by 2.4% in March, marking the largest monthly gain since July of last year, as demand for the world's reserve currency, the US dollar, was boosted by safe-haven demand during the Middle East conflict. However, since the US and Iran began negotiations on the six-week conflict, the index has fallen by 1.8% in April, including a seven-day consecutive drop as of Tuesday. Analysts at Morgan Stanley wrote in a research report released on Tuesday, "The path of US dollar weakness is widening, not narrowing; a ceasefire in the short term may benefit risk currencies, but we believe the medium-term trend of US dollar weakness may be more concentrated on major currencies such as the euro, yen, and Swiss franc." More and more US dollar observers also agree with the view that the US dollar will weaken further, including former chief economist of the International Monetary Fund Kenneth Rogoff, who stated that the US dollar "may still be overvalued by at least 20%," thus facing the risk of a long-term adjustment. Rogoff added that this war may accelerate the process of Europe and other regions "becoming more independent of the US dollar." Last week, after the announcement of a two-week preliminary ceasefire agreement, selling pressure on the US dollar began to increase, leading to the largest single-day drop in the Bloomberg Dollar Index in over two months. Antony Foster, head of G10 spot trading at Nomura's London branch, said, "Hedge funds have been waiting to sell the US dollar, and the first ceasefire has become the catalyst. It was the most intense day of US dollar selling that I have seen in a while on April 8, with most G10 currency pairs experiencing this in both spot and options markets." According to data from the Depository Trust & Clearing Corporation, on Tuesday, trading volume in euro call options against the US dollar amounting to 100 million euros (118 million US dollars) or more exceeded trading volume in euro put options by 50%. Call options benefit from a rise in the euro, while put options rise when the US dollar strengthens. Richard Oliver, global head of FX cash at HSBC Holdings in London, said, "In the short term, we see short-term money accounts buying euros through relatively low-cost option structures in anticipation of upside potential. Moderate de-dollarization is becoming an increasingly important medium-term theme." According to CEO Massimiliano Bondurri, SGMC Capital Pte, a Singaporean asset management company, is one of the companies that increased their short positions during the US dollar's strength in March. He said, "We have been gradually increasing our short positions by taking advantage of the recent strength of the US dollar, as we expect any eventual easing of the situation to weaken the US dollar." Bondurri stated that if a more lasting ceasefire agreement is reached, there is further room for the US dollar to decline. He pointed out that preferable trading strategies include selling the US dollar against the Australian dollar, Mexican peso, and Brazilian real. Although the duration of the US-Iran conflict remains uncertain, the likelihood that this war ultimately causes more harm than benefits to the US dollar is increasing. Analysts at JPMorgan Chase wrote in a client report released last week, "In conclusion, the US dollar seems to be in a worse position due to this conflict." They stated that in the medium term, the US dollar may "fall again to its low point of the year."