Leveraged funds are increasing their short positions on the U.S. dollar while market participants await further specifics from Treasury Secretary Scott Bessent regarding his new fiscal approach aimed at tackling the steepest borrowing expenses seen in several years.

This downward pressure became apparent on Friday, as the greenback extended its decline following Bessent's Aug. 19 decision to "at least double" the scale of buybacks for longer-maturity securities. That move triggered the dollar's steepest one-day drop in nearly three weeks and prompted a significant wave of selling in the cash market. The currency remained largely stable during Asian trading hours on Monday.

"We have observed a particularly strong reaction from hedge fund clients in the linear space, with dollar selling picking up momentum against a backdrop of persistent dollar supply throughout August," said Torsten Schoeneborn, London-based co-head of G-10 FX trading at Barclays Plc., on Friday. He noted that real-money flows have been far less directional in comparison.

Scott Bessent's assertive measures to curb the rise in U.S. borrowing costs have led some investors to conclude that the dollar will ultimately bear the consequences. They anticipate that any shift by the Treasury toward active yield management could undermine confidence in the currency.

Bearish sentiment toward the dollar is equally apparent in the options market. The cost of hedging against the dollar's decline over the coming month, relative to its potential upside, has risen to its highest level since February, according to a Bloomberg gauge.

"Following the Treasury buyback announcement, we have seen increased demand for dollar downside hedges throughout the FX options market," said Akshay Saxena, Singapore-based head of FX options trading for Asia at Citigroup Inc.

Saxena indicated that the most significant repricing occurred in Swiss franc implied volatility, a measure of expected future currency movements that directly influences option premiums. The franc's one-month implied volatility surged to a more than two-week high last week, while comparable metrics for the euro, sterling and the Canadian dollar also advanced amid renewed institutional interest in greenback put structures, he added.

On Aug. 21, demand for dollar put options against the euro—which appreciates as the dollar weakens—was 47% higher than demand for dollar call options, according to data from the Depository Trust and Clearing Corp. based on contracts valued at $150 million or more.

In Asian trading, Saxena noted that demand has centered on short-dated options, particularly in the Korean won, Thai baht and Singapore dollar, while offshore yuan volatility "has attracted interest" given the currency pair's proximity to multi-year lows.