The euro has fallen to its lowest level in nearly two months against the US dollar, with options traders ramping up wagers for additional weakness following the Federal Reserve's latest rate hike. The single currency dropped for a third consecutive session on Wednesday, sliding 0.2% to $1.1426. Options market indicators show sentiment is increasingly turning bearish, with positioning for the year-end approaching levels last seen in mid-August.
This move comes as market pricing accounts for further tightening from the Fed, which is eroding the "policy divergence" theme that had supported the euro throughout the summer. Persistently elevated energy prices are adding another headwind, dragging on the eurozone's growth outlook even as oil heads for a sixth straight day of declines.
Euro's Slide Accelerates, Annual Low in Sight
According to data from the Depository Trust & Clearing Corporation (DTCC), this shift has accelerated since the Fed's decision last week. Following the European Central Bank's most recent hike, options exposure was nearly evenly split between bulls and bears, but since the Fed meeting, roughly 60% of the total notional volume has been positioned for a weaker euro.
ECB Governing Council member Joachim Nagel indicated that if elevated energy prices persist, officials may be forced to raise interest rates to levels that restrain economic growth. They might "have to enter the mildly restrictive territory of monetary policy," he said.
The contrast with the US economy continues to underpin the dollar. While tightening by other major central banks could limit the greenback's scope for fresh cyclical highs, Elias Haddad, global head of market strategy at Brown Brothers Harriman in London, noted that "the US growth advantage over other major economies leaves risks to the dollar skewed to the upside."
DTCC data also reveals that euro hedging is extending further out the curve. Since the Fed meeting, the weighted average tenor of bearish euro exposure has lengthened by more than 10%, while lower strike prices are attracting increased interest.
Bearish Euro Bets Rise Following ECB Meeting
Political uncertainty is also applying pressure. France faces another difficult budget battle in a divided parliament, while the CDU led by chancellor candidate Friedrich Merz is dealing with the fallout from its worst-ever result in a German state election.
Matthew Hornbach, head of global macro strategy at Morgan Stanley, said higher US rates and political risk premiums unfavorable to the euro make it harder for the currency to rally against the dollar. Deutsche Bank, however, sees limited room for sustained euro declines. Its analysts expect the euro to trade in a range against the dollar, arguing that resilient global growth and significant tail risks for the greenback should cap euro weakness, while Fed rate hikes and elevated energy prices limit upside potential.
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