Euro Options Activity Highlights Ongoing Dollar Risk Hedging

Key Moments

Options Markets Point to Structural Shift

Commerzbank’s Michael Pfister observes that EUR/USD has retreated to levels under 1.18, close to where it was before the pair’s recent upward move gained traction. He notes that, on a year-to-date basis, the Euro has only posted a slight appreciation against the US Dollar in the spot market.

Despite this modest spot performance, Pfister emphasizes that options markets continue to indicate a deeper structural change dating back to what he calls “Liberation Day.” According to his assessment, investors are increasingly turning to Euro options as a preferred tool to manage Dollar-related risks, underscoring the Euro’s role as the primary alternative reserve currency.

Market Commentary from Commerzbank

Pfister characterizes the recent market backdrop as more stable but stresses that the underlying options signals remain significant:

“The situation has now calmed down somewhat, with EUR-USD trading well below 1.18 — roughly where it was before the movement higher picked up speed. Over the course of the year, the euro has actually only appreciated slightly against the US dollar. Were the last few weeks just much ado about nothing? I wouldn’t go that far.”

He points out that, even as spot prices retraced, options positioning has stayed aligned with the pattern established since “Liberation Day”:

“Although the spot markets appear to have corrected again, the options markets clearly show a continuation of the trend since ‘Liberation Day’. At that time, my boss illustrated that, in times of increased uncertainty (as measured by higher implied volatility), hedges against a stronger euro were now favoured over hedges against a stronger US dollar, unlike in the past.”

Differentiation Across Currencies

Pfister notes that this behavior has not been uniform across the broader FX complex:

“However, this development stalled for the other currencies in the second half of the year, as the risk of US dollar depreciation was apparently no longer considered quite so great. Since 23 January, when the latest phase of a weaker US dollar gained momentum, it has been EUR-USD options that have reacted.”

Implications for the Euro’s Reserve Role

While acknowledging that the recent dataset spans only a limited period, Pfister views the options dynamics as reinforcing the Euro’s unique status:

“Naturally, we are only dealing with a few days’ worth of data here, and we will have to wait and see how future crisis situations unfold before we can speak of a trend reversal. But in my opinion, this once again demonstrates why the euro is widely regarded as the only currency capable of replacing the US dollar as the world’s reserve currency.”

Looking ahead, he expects this preference to persist:

“Therefore, the market is likely to continue expressing its concerns about the US dollar through EUR options rather than the other major currencies in the coming months.”

Spot vs. Options: Current EUR/USD Snapshot