Macro hedge funds are increasingly turning to currency option trades that exclude the US dollar, as they navigate market volatility prompted by concerns over the US economy, according to a report by Bloomberg citing data from the Depositary Trust Clearing Corp (DTCC).
On Monday, options trades involving the euro and yen dominated DTCC activity, with the two currencies making up more than half of all transactions. This shift came as US tech stocks suffered their steepest decline since 2022.
According to Morgan Stanley strategists, long euro positions have surged to their highest levels since 2020, following a strong euro rally. The currency gained momentum after German Chancellor-in-waiting Friedrich Merz pledged to boost government spending.
The Federal Reserve’s cautious stance on interest rate cuts, as signalled by Chair Jerome Powell, has also bolstered demand for non-dollar currency trades. Additionally, the threat of US tariffs next month has heightened concerns about pressure on various currencies.
Hedge funds have increased their exposure to euro trades against Asian and commodity-linked currencies, including the Australian dollar, Canadian dollar, and offshore yuan, according to Mukund Daga, head of foreign-exchange options for Asia at Barclays.
Interest in euro-sterling and euro-Swiss franc options has also risen, according to Sagar Sambrani, a senior foreign-exchange options trader at Nomura International Plc. Euro-dollar options trading volumes on DTCC meanwhile, were down more than 60% from their peak on 5 March, suggesting a cooling in demand for dollar-based trades.
The euro gained as much as 0.8% versus the dollar on Tuesday, further supported by reports that Germany’s Green Party is close to securing a defence spending deal.
Options trades involving the yen against currencies other than the dollar are also gaining traction, according to Sambrani, despite slowing momentum for a stronger yen.
