Hedge funds are increasingly turning to options to bet on a year-end rebound in the US dollar, as investors anticipate further weakness in major peers such as the euro and yen, according to a report by Bloomberg citing data from the Chicago Mercantile Exchange.
Market participants in Europe and Asia have ramped up trades in euro-dollar and yen-dollar options this week, with December-expiring put options—profiting from a decline in these currencies—seeing three times the volume of call options.
Traders attribute the dollar-focused activity to a combination of factors, including France’s political turmoil weighing on the euro, expectations that Japan’s incoming leadership may slow interest-rate hikes, and a 50-basis-point cut in New Zealand. Hedge funds have mostly purchased vanilla call options or call spreads against G-10 currencies, seeking tactical exposure to the greenback.
The Bloomberg Dollar Spot Index hovered near two-month highs despite a slight dip in Asian trading, reflecting continued confidence in the US currency amid uncertainty surrounding other fiat currencies. Daga added that some investors are also buying longer-term “tail risk” options designed to profit from a significant dollar rally.
