The euro is playing an increasingly important role in global currency options markets as traders shun the dollar due to unpredictable U.S. policy and the risk of a global trade war.
There has been a shift in trading volumes. Comparing the first five months of this year with the last five months of 2024, about 15% to 30% of contracts tied to the dollar against major currencies have shifted to the euro, according to data from the Depository Trust & Clearing Corporation. There are also signs that the euro is being used as a safe haven asset - a role traditionally reserved for the dollar - and for betting on big moves.
While transactions involving the dollar still dominate the $7.5 trillion daily currency market, this could be an early sign that the greenback is facing greater competition as the world's reserve currency. Traders are shunning the dollar after its biggest drop in years, and the euro appears to be the main beneficiary as European markets benefit from tens of billions in government stimulus spending.
“If we’re moving to an environment where the European flows story is more important, we may be moving to an environment where everything is driven by the euro pair,” said Oliver Brennan, options strategist at BNP Paribas SA.
The euro has risen 11% against the dollar so far this year, hitting its highest level since 2021 at over $1.16. Meanwhile, the dollar has fallen against all major currencies, with one measure down more than 7% to its lowest level since 2022. That’s eroding trust in U.S. assets.
And the decline may not be over yet. Hedge fund giant Paul Tudor Jones just predicted the dollar will fall another 10% over the coming year. Risk reversals, a measure of options sentiment, are turning increasingly negative for the dollar against the yen, while bearish sentiment on the euro against the yen is fading — a “very important signal” for the euro, Brennan said.
As markets question the stability of the dollar, euro-yen implied volatility relative to dollar-yen swings is at its calmest level in nearly four years.
“The market is thinking that USD/JPY will move more than EUR/JPY in the event of a negative market shock, which is the opposite of how the market has traded these events in the past,” Brennan said. “If this is what the market is thinking, then it means that the market sees the euro as a safer haven asset than the dollar.”
Macro Hive currency strategist Ben Ford said options costs are also a driver. While implied volatility has generally eased after surging during the market chaos in April, three-month implied volatility for USD/JPY is still close to 11%, while for EUR/JPY it is below 9%.
“The market is looking for cheaper ways to express its view, especially given that the view may be that the euro outperforms,” Ford said.
Traders also appear to favor the euro over the dollar when it comes to hedging, or betting on large directional moves in the yen. This is evident in the so-called 10-delta butterfly spread, a measure of demand for large moves, where the gap between EUR/JPY and USD/JPY has been steadily widening since April.
Of course, the dollar has been called bearish many times before. As recently as the start of the year, the euro was hovering near parity with the dollar, with many investors convinced that the euro’s value would fall below the greenback.
Instead, Trump’s tariff announcement in April led investors to sell dollar assets. While U.S. stock markets have since recovered, the dollar risk premium remains elevated, and Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said it may take a renewed display of U.S. exceptionalism to reverse the trend.
Meanwhile, European Central Bank President Christine Lagarde has called on policymakers to seize the moment and boost the euro’s global profile.
“There’s a push and pull factor — the pull is the possibility of more safe assets to buy in Europe and more growth expectations in Europe,” said Brennan of BNP Paribas. “And the push is the tariff uncertainty, the risk of U.S. exceptionalism and the macro factors.”
