Hedge funds are ramping up bullish bets on the U.S. dollar through the options market, wagering that the greenback’s rebound against major peers will continue through year-end. Trading data from the Chicago Mercantile Exchange showed euro-dollar put options expiring in December traded at three times the volume of calls on Wednesday, signaling expectations that the euro will weaken further against the dollar. The positioning reflects broader market sentiment that the dollar remains a defensive hold even amid recent political and fiscal turbulence in Washington.
Barclays strategist Mukund Daga noted that funds have been tactically buying vanilla call options and spreads on the dollar versus the euro, sterling, yen, and New Zealand dollar, with the Australian dollar the lone exception due to a hawkish Reserve Bank stance. These moves reflect growing confidence that the dollar’s late-summer softness has bottomed out. Pressures abroad, including France’s political turmoil, Japan’s cautious monetary stance, and New Zealand’s surprise 50-basis-point rate cut, are reinforcing demand for the dollar as a relative safe haven.
Market Overview:- Hedge funds increasing dollar option bets ahead of year-end.
- Euro-dollar put options tripled call volumes in CME data.
- Dollar supported by global political and monetary headwinds.
- Funds buying vanilla call options against G-10 currencies except AUD.
- Euro pressured by French politics, yen by policy slowdown, NZD by rate cut.
- Bloomberg Dollar Spot Index remains near two-month highs.
- Citigroup notes risk reversals signal a potential turning point in demand.
- Longer-term “tail risk” options highlight expectations of a stronger rally.
- Fiat confidence weak, but the dollar still seen as the most resilient hold.
- Hedge funds are aggressively increasing bullish dollar positions through options, betting that persistent global volatility and relative weakness in the euro, yen, and other G-10 currencies will drive continued greenback strength into year-end.
- Surging demand for euro-dollar puts and vanilla calls versus major currencies—supported by factors like France’s political turmoil, Japan’s slow policy stance, and New Zealand’s rate cut—signal widespread asset manager conviction that the dollar is the safest defensive play amid international uncertainty.
- The Bloomberg Dollar Spot Index holding near two-month highs and the spike in longer-dated, “tail risk” options suggest markets see both near-term resilience and the potential for an outsized rally if renewed shocks hit Europe or Asia.
- Institutional portfolios that lean into the dollar’s haven status may capture positive carry and diversification benefits as competitors face policy headwinds and macro risks into Q4.
- Action for FX and macro sales teams: Highlight dollar option opportunities with clients seeking to hedge global portfolios or capitalize on defensive flows; monitor CME and OTC activity for signals of position saturation or new waves of flows tied to headlines.
- Extreme positioning in dollar options and crowded bullish trades raise the risk of a sharp reversal if U.S. fiscal instability, policy pivots, or positive surprises in foreign markets catch investors offside—potentially spurring rapid unwinds and FX volatility late in the year.
- While demand for G-10 puts signals caution, Citigroup notes that risk-reversal spikes can sometimes mark turning points, and a rapid improvement in eurozone, Japanese, or emerging market sentiment could quickly sap dollar demand.
- Ongoing skepticism about all fiat currencies—including the dollar—implies that any visible cracks in U.S. policymaking, rate guidance, or fiscal negotiations could see the “safe haven” premium unwind as quickly as it appeared.
- The Australian dollar’s resilience hints at the market’s ability to pivot quickly if macro conditions change, and any upside surprises from lagging economies could fuel violent short squeezes and erode bullish dollar returns.
- Strategy for risk teams: Track correlation shocks, hedging costs, and FX carry at portfolio level; be prepared for scenarios in which overly crowded long-dollar trades destabilize liquidity or trigger negative feedback loops into year-end rebalancing.
Citigroup’s Nathan Swami said the surge in risk reversals across G-10 majors is a strong signal of demand for the dollar, though he cautioned it is too early to confirm a full bottoming. Still, traders are also buying longer-dated, cheaper contracts that would pay off in the event of a significant rally, suggesting markets are hedging for tail risks. The Bloomberg Dollar Spot Index slipped slightly in Asian trading Thursday, but remains near its highest level since early August.
For hedge funds, the trade reflects both relative weakness in other major currencies and a broader belief that despite low confidence in fiat money, the dollar remains the safest store of value. With volatility in Europe and Asia persisting, the greenback could remain the asset of choice for institutional investors heading into the final quarter of the year.
