Investors should take data showing currency speculators started to bet against the U.S. dollar this month for the first time since March with a big grain of salt.

While the turnaround in positioning from long to short on the dollar shows that sentiment on the U.S. currency has deteriorated sharply, analysts say it should not be interpreted as a sign the greenback is about to collapse.

Fears that the U.S. economy is at risk of a double-dip recession after a string of weaker-than-expected data this month have been weighing on the dollar and helping contribute to a gradual erosion in long dollar positions.

Declines in the greenback accelerated last week and the euro hit a two-month high after the Federal Reserve's minutes of its last meeting showed policymakers were concerned the U.S. recovery may be slowing.

The dollar is under pressure again and we may see some declines in the short term, but no one is incredibly bullish on the euro either, said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York.

Data from the Commodity Futures Trading Commission and Reuters on Friday showed a net short dollar position of about $5.02 billion in the week ended July 13, compared with a net long position of $3.82 billion in the previous week.

Speculators have been long the dollar for most of 2010 and were last betting against it in the week to March 16, when the value of the net short position was just $121 million.

We have not seen a larger weekly positional shift away from the dollar since July 2008, said Gareth Berry, a currency analyst at UBS AG.

Sovereign debt woes in the euro zone, coupled with massive short positions, helped bring the single currency to as low as $1.1878 at the start of June. But it has since rebounded.

The single currency gained about 6 percent versus the dollar this month alone, rising on Friday above $1.30, an important psychological level, for the first time since May.

Earlier in the week, Fed officials revised down their outlook for economic growth in the second half of the year, while the Fed minutes said the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.

According to Reuters data, one-month euro/dollar risk reversals were at -1.55 on Monday, easing from extreme levels but still showing a bias toward euro puts and dollar calls. That indicates more investors are still betting the euro will fall than rise.

POSITION VERSUS FUNDAMENTALS

But for Todd Elmer, a currency strategist at Citigroup Inc in New York, recent price action in the forex markets has been more of a reflection of shifts in positioning rather than shifts in fundamentals.

He said the current positioning indicates that in the short-term, risks remain to the upside for the euro.

The last time the value of the dollar's net short position was larger was when it reached $11.77 billion in the week to December 8, 2009, according to Reuters calculations.

On that occasion, the dollar index .DXY actually rose 1.2 percent in the week after December 8, added 4.1 percent in the following month and went on to gain 5.8 percent in the first quarter of 2010.

The dollar index -- which measures the dollar's performance against a basket of six currencies -- is a broad measure encompassing major currencies such as the euro and yen that is used in Reuters short dollar calculation.

Amid low trading volumes, trend-following models have gotten the upper hand in price action, squeezing macro traders out of their euro shorts, UBS said. Over the medium term however, we continue to see the euro ... moving substantially lower against the dollar.

UBS says euro/dollar remains above its long-term fair value at $1.20, which coincided with the bank's one-month forecast for the pair. UBS sees the euro falling further, to $1.15 in three months.

But for now, currency markets will focus on Friday's results of stress tests on 91 banks across 20 countries that should give an indication of how Europe's banking system would cope with another downturn.

Those results will likely determine the near-term currency outlook.

A benign report on European banks later this week, combined with technical momentum, could see the euro outperforming even more, Elmer said. As for the dollar, it makes sense to see it continue to weaken, particularly against the commodity currency bloc.

(Editing by Dan Grebler)

Currency war