Sentiment toward the US Dollar (USD) has brightened considerably recently. This is evident not only in the exchange rate, which has appreciated significantly, but also in the options market. With the start of US President Trump's second term in office, a turnaround took place and the market began to increasingly price in the risk of a significant depreciation of the dollar against the euro. After Liberation Day, hedges against a dollar crash were even more expensive than hedges against a significant euro depreciation – something that has rarely been seen in recent years, except in exceptional situations such as the pandemic, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

EUR/USD risk reversals turn negative again

"Otherwise, the euro was generally considered the riskier currency. However, this changed with the threat of extensive US import tariffs by the US government, which was clearly perceived as a turning point by the market. Since their high in May of this year, however, prices for insurance against a collapse of the US dollar against the euro (EUR/USD risk reversals) have fallen significantly again and have even recently returned to negative territory. This means that the market is now pricing in higher euro risks again, albeit (still) to a limited extent."

"This is understandable to some extent: the waves on the trade front have recently calmed down significantly, especially with regard to the conflict between the US and China. The recent concessions made by both governments indicate that neither side has any interest in escalating the dispute. This also reduces the risks for the US economy. In addition, the Supreme Court has now expressed skepticism about the introduction of reciprocal tariffs, which increases the likelihood that they will be overturned."

"On the one hand, the rivalry between the US and China has not been completely resolved; after all, it is not only economic but ultimately also ideological in nature. In my opinion, it is thus only a matter of time before the conflict flares up again. On the other hand, US policy poses risks to the dollar not only in terms of trade, but also – if not primarily – in terms of monetary policy. Have the president's unprecedented attempts to influence the US Federal Reserve been completely forgotten? The Supreme Court has yet to rule on the dismissal of Fed Governor Lisa Cook. In addition, US President Trump will appoint a new Fed chair next year. I still see plenty of potential for nasty surprises here. Against this backdrop, I consider it premature to rule out any dollar risks."