CFTC data from last weekend showed the largest net speculative long position in EUR futures since 2020. The total USD short position is less extreme, but sits near levels seen in 2023 and after Liberation Day.
The US Administration has indicated it prefers a weaker dollar and lower interest rates. Lower rates would reduce the cost of hedging foreign exchange exposure on large foreign-owned US equity and bond holdings.
Positioning Remains Crowded
Despite that backdrop, USD selling has struggled to progress and short positions remain crowded. DXY fell below its 50-, 100- and 200-day moving averages in mid-January.
A rise of a little over 1% would push DXY back above those moving-average levels. The setup implies that the recent break lower could be reversed with a modest rebound.
Betting against the US dollar has become a very crowded trade, with speculative positioning resembling the extremes we saw back in 2023. Last weekend’s data showed net long euro futures positions have reached their highest point since 2020. This indicates that many traders are already positioned for dollar weakness, leaving little room for more sellers.
Even though the US Administration would prefer a weaker dollar to ease financial conditions, the bears are failing to push it lower. The US economy remains stubbornly resilient, with the latest reports from January showing annual inflation holding firm at 2.8% and retail sales surprising with a 0.8% jump. This fundamental strength provides a solid floor for the dollar against other currencies.
Options May Offer Better Asymmetry
From a technical standpoint, the DXY index did dip below its key 50, 100, and 200-day moving averages last month, but this move looks fragile. A modest gain of just over 1% from its current level would be enough to push the index back above all those averages, trapping short-sellers. Therefore, aggressively selling the dollar here appears to be a high-risk strategy.
For derivative traders, this environment suggests caution on outright short dollar positions via futures. The build-up of shorts raises the probability of a sharp rally, or a “short squeeze,” in the coming weeks. A better approach may be to use options to define risk, such as buying DXY call spreads or selling out-of-the-money puts to collect premium.
The crowded long euro trade, which we saw unwind painfully in late 2025 from similar levels, presents a specific opportunity. Traders could consider put options on the EUR/USD pair as a hedge or a speculative bet on a reversal. If the dollar catches a bid, the over-owned euro is likely to feel the most pressure.
