Some investors are betting on a slow, steady grind downward for the U.S. dollar.

Hedge funds and asset managers are scooping up derivatives that pay off when the dollar declines slowly or stays within a narrow range. In one strategy, known as a strangle, traders sell both bullish and bearish options for short periods. They can collect a premium from selling the contracts and profit as long as the underlying currency remains steady and doesn’t trigger the options.

The bets on a calm retreat mark a shift after last year’s pandemic-heightened swings. Many expected the dollar to slide in 2021, as global growth outpaced the U.S. expansion. Instead the U.S.’s rapid vaccine rollout and economic resurgence have supported the currency, reducing volatility along with the opportunity for traders to make money off swings. The WSJ Dollar Index has…

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