By Nell Mackenzie, Carolina Mandl and Summer Zhen

LONDON () -Hedge funds have positioned for Donald Trump’s U.S. presidency with their highest levels of borrowing since 2010, while betting the dollar would continue to rise, according to bank research and industry data.

U.S. stock trading hedge funds kicked off the week with gross leverage levels in their highest range since 2010, a note from Morgan Stanley (NYSE:)’s prime brokerage seen by showed. Gross leverage reflects how much a hedge fund has increased its market positioning.

European stock traders wagered that European equities would rise, especially in financial, tech and energy companies, said the note.

Lower taxes, deregulation and higher tariffs might create tailwinds for some U.S. stocks, but tariffs and added volatility would deter gains more widely, said an investment letter by James Hanbury and Jamie Grimston, portfolio managers of the two funds at Lancaster Investment Management in London overseeing roughly $1.4 billion in assets.

“This will be going on whilst the U.S. fiscal deficit is at greater than 6% with the economy currently at full employment,” said the letter.

Higher volatility and lower regulation “should be beneficial for Plus500 (LON:) and IG Group where we have a smaller holding,” it added, referring to financial firms in which the hedge fund held long positions.

AMERICA FIRST

Trump kicked off his White House tenure with several protectionist policies to hoist American economic interests over trade partners.

Going into the inauguration, hedge funds dumped emerging markets stocks outside of China in the largest net selling since October, said a separate note from Goldman Sachs on Friday.

Hedge funds’ China trades have fallen to five-year lows, said the note.

Hedge funds trading macroeconomic signals, including systematic trend followers, continue to bet on a strong dollar, a separate weekly note from JPMorgan said on Jan. 13.

Barclays (LON:) said in a separate note that CTAs’ – commodity trading adviser funds that trade futures and other derivatives – long dollar bets are “stretched, especially versus the euro.”

“Looking at markets going forward … we are strong proponents of the Trump trade in currency markets, strongly long the dollar in the G10, especially against sterling and the euro,” said Russel Matthews, a senior portfolio manager in global macro at RBC BlueBay Asset Management, in London.

Russel said the investment manager was short the pound against the dollar “quite aggressively,” given how deeply the UK Labour Party’s policies have been “picked over and criticised.”

A short position implies an asset will weaken in value.

While RBC BlueBay has taken some if its trade off the table, the firm expects continuing dollar strength to push the euro to $1 or below.

“We know there will be punitive measures taken against Europe … we have yet to see what these will be, but this is coming,” said Matthews.

Some portfolio managers are looking at the impact a stronger greenback may have on businesses and countries with dollar debt.

“You may see a strengthening dollar that could lead to problems for many emerging market companies that have debt issued in dollar terms,” said Sina (BitStamp:) Toussi, chief investment officer at special situations hedge fund Two Seas Capital, with $1 billion in assets under management. He added that countries with high external debt in dollars could also struggle.

“We haven’t seen any real dislocations yet in the market, but we’re spending some time trying to anticipate where some of those dislocations can happen.”

Hedge funds trading China expect near-term volatility, particularly after Trump on Tuesday said his administration was discussing a 10% punitive duty on Chinese imports.

Stanley Tao, CIO at Golden Nest Capital, a Hong Kong-based hedge fund managing $250 million, remains cautious for the first half of the year, given it takes time to see what action Trump will take and how China will respond.

“If the Trump administration is harsh on China, China may roll out unconventional stimulus measures, which could actually benefit the stock market,” Tao said.

He favours stocks driven by domestic demand and exporters focusing on non-U.S. countries, while he said he would stay away from the auto sector, companies with overcapacity issues and manufacturers directly exposed to tariff risk.