The U.S. dollar, after experiencing a sharp decline earlier this year, is showing signs of further weakening according to the foreign exchange (FX) options market. Investors are increasingly buying put options on the dollar, signaling a bearish outlook driven by concerns over the U.S. economy and ongoing trade tensions. Despite a recent pause in some tariffs easing market nerves, demand for dollar puts remains high compared to calls, indicating that traders expect the dollar to continue losing value against major currencies like the euro and yen.
This shift in sentiment contrasts with early 2025 expectations when President Trump’s policies, such as tax cuts and protectionist measures, were thought likely to strengthen the dollar. However, the introduction of broader and larger tariffs in April triggered market volatility and sent the dollar to a three-year low. Options data reveal that euro/dollar risk reversals have approached their highest bullish levels since 2007, with investors showing strong demand for euro calls and dollar puts as a reflection of the dollar’s anticipated decline.
Market strategists point to positioning in the FX options market as evidence of a prolonged dollar downturn. The euro has gained nearly 10% against the dollar this year, and options traders expect this trend to continue gradually. Meanwhile, demand for dollar puts is also strong against other currencies such as the Japanese yen and the Australian dollar. Overall, this suggests investors are increasingly skeptical about the dollar’s near-term prospects amid expectations of a slower pace in U.S. economic growth relative to other advanced economies.
Underlying this trend is growing investor concern over rising U.S. debt levels and a widening budget deficit, which have weakened confidence in the dollar’s strength. Although the dollar remains the world’s dominant reserve currency, supported by the U.S. government’s creditworthiness and relatively higher interest rates, many traders believe the currency’s path of least resistance is downward. Some anticipate only modest relief rallies, while the broader consensus favors a gradual dollar depreciation driven by global economic shifts and portfolio rebalancing.
Despite occasional short-term pauses, FX market participants from various backgrounds are accumulating dollar puts as a hedge against further declines. These trades reflect an overarching view that the combination of trade policy uncertainty, economic fundamentals, and market positioning make a bearish dollar outlook the most plausible scenario over the coming months. As one trader put it, exposure to dollar weakness remains a favored strategy amid the current global financial environment.
Source: Reuters