Options market positioning has moved sharply against the U.S. dollar this week, with traders paying up to buy other currencies and hedges climbing to multi-month highs.
Three-month risk reversals for the euro - a gauge that measures the price gap between options that give the right to buy the currency and those that give the right to sell it - jumped to 1.38 percentage points on Wednesday. That reading is the highest since last April’s five-year peaks and represents a sizable rise from roughly 0.28 percentage points a week earlier. At the same time the euro strengthened in the spot market, reaching $1.20 on Wednesday for the first time since mid-2021.
Sterling’s option market also displayed movement away from the dollar. Three-month risk reversals for the British pound moved to -0.04, the strongest reading since last May, compared with -0.475 at the start of January. The pound has risen to its strongest level versus the dollar since July of last year.
The cost of derivatives to buy other currencies climbed to the highest levels in months on Wednesday, reflecting the broader shift in positioning. Market participants have been trimming exposure to U.S. assets, a trend that has been tied to both rising policy volatility from trade-related developments in Washington and speculation about deliberate U.S. policy toward a weaker dollar.
"Participants in the rest of the world continue to trim exposure to U.S. assets, in reflection not only of the increased policy volatility that continues to emanate on the trade front from Washington DC, but also amid speculation that the Trump administration might be pursuing what one could reasonably call a ‘less strong dollar’ policy," said Pepperstone senior research strategist Michael Brown.
Brown added that the so-called "bye America" trade has become a dominant theme for currencies. When asked whether he thought the dollar had fallen too far, the U.S. president said on Tuesday that the value of the dollar was "great."
Attention has also been focused on the Japanese yen. The yen is poised for its strongest monthly performance versus the dollar since last April amid persistent speculation about possible coordinated Japanese-U.S. official intervention to support the currency. Three-month risk reversals for the yen reached -2.0, down from -0.575 at the beginning of the year. In the case of the yen, a more negative risk reversal indicates greater bullishness for the yen and increased bearishness for the dollar, which differs in sign from the interpretation for euro and sterling risk reversals.
Overall, the options market data indicate a notable reallocation of currency risk away from the dollar and toward alternative currencies, as both implied costs and spot exchange rates reflect that repositioning.
Contextual note: The analysis above is based on market option pricing metrics, spot exchange movements, public comments from political leaders, and strategist commentary that were reported in market updates this week.