Commerzbank’s Michael Pfister notes that while EUR/USD has slipped back below 1.18 and the Euro’s spot gains versus the Dollar are modest year-to-date, options markets still reflect a structural shift since “Liberation Day.” He argues that investors increasingly use EUR options to hedge Dollar risk, reinforcing the Euro’s status as the main alternative reserve currency.

Euro options remain key Dollar hedge

"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."

"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."

"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."

"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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)