The Long Dollar Trade Is Getting Really Crowded

Perhaps to the surprise of no one, the long dollar trade is increasingly popular ahead of the Federal Reserve's December meeting, as many traders are anticipating the central bank will finally raise interest rates, which should be dollar positive.

“Increasingly popular” means traders could be making the long dollar trade a crowded trade. Data confirm as much, with numbers indicating hedge funds are holding the most long greenback trades they have held in over a year.

“Large speculators increased bets that benefit from greenback appreciation by a net 92,293 contracts in the week through Nov. 17, data from the Commodity Futures Trading Commission showed Friday. A spate of economic updates scheduled before the U.S. Thanksgiving Day holiday on Nov. 26 may encourage further positions, as the Federal Reserve scrutinizes data for signs it should raise interest rates in December. The dollar was little changed this week versus a basket of 10 major peers, after reaching a seven-month high versus the euro on Nov. 18,” reported Bloomberg.

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U.S. Dollar Bullishness

Bullish enthusiasm for the U.S. dollar is also being reflected in exchange-traded funds, namely the PowerShares DB US Dollar Index Bullish UUP and the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.

UUP, the U.S. Dollar Index tracking ETF, and the actively managed USDU enter Monday residing 2.1 percent and 0.6 percent below their 52-week highs.

Focus On UUP

Over the past month, UUP has hauled in nearly $89.5 million in new assets, a total surpassed by just three other PowerShares ETFs. Inflows to UUP are accelerating. Over the past week, the ETF has added $145.3 million in new assets, according to issuer data.

Among PowerShares ETFs, only the PowerShares S&P 500 Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II SPLV) has added more new assets than UUP over the past week.

Increasingly Popular, And 'Most Vulnerable'

With increased popularity of bullish dollar bets comes increased vulnerability. In fact, it is probably safe to say long dollar is the most fragile trade heading into the December Fed meeting.

A recent Bank of America Merrill Lynch fund managers' survey called the long dollar trade the most vulnerable trade heading in the Federal Reserve's December meeting. However, the same survey also showed 81 percent of participants expect the Fed to hike rates next month, up from 47 percent in October.

Still, there is allure to the long dollar trade; even if the Fed does not cooperate because the European Central Bank and Swiss National Bank, among other developed market central banks, UUP and USDU could soon engage in more loose monetary policies.