Hedge funds up euro short bets as amid elevated French fiscal risks

Hedge funds are increasing their use of options to position for further weakness in the euro against the US dollar as political uncertainty and fiscal pressures in France weigh on the common currency, according to a report by Bloomberg.The report cites data from the Depository Trust & Clearing Corporation as showing that large options trades betting on a decline in the euro outnumbered those positioned for gains by more than two-to-one over the two days to then end of 1 October.Demand for euro puts has been rising among both hedge funds and traditional asset managers, according to Julian Weiss, Bank of America’s head of Group-of-10 foreign-exchange options trading in London.The euro fell to $1.1266 on Thursday, its lowest level since May 2025, after declining 2.5% against the dollar during September. That marked the currency’s weakest monthly performance since July 2025.The latest move has come as investors focus on France’s fiscal position and as expectations for US interest rates have shifted in favour of the dollar. Thomas Bureau, global head of foreign-exchange options trading at Societe Generale, said euro-dollar had become one of the preferred ways for investors to position for renewed dollar strength.France’s unveiling of its 2027 budget on Thursday has added another source of uncertainty. The government is seeking to fund a large budget deficit while also refinancing maturing debt, with plans to issue a record €340bn of bonds next year.The budget is expected to trigger a contentious political debate and could put further pressure on Prime Minister Sébastien Lecornu’s government. Investors are also looking ahead to France’s presidential election next year, with opposition parties having signalled limited willingness to compromise with President Emmanuel Macron.Options positioning suggests investors are preparing for euro volatility over a range of time horizons. Bank of America’s Weiss said demand has increased for both short-dated protection and contracts extending into the middle of 2027, covering the period around next year’s European political cycle.The shift in currency positioning follows heightened stress in European bond markets. Measures of French sovereign risk have climbed to their highest levels since the euro-area debt crisis in 2012, while rising energy prices linked to the continuing conflict in the Middle East have added to concerns over inflation and Europe’s energy dependence.Hedge funds have been particularly active in one-month options, which encompass upcoming European Central Bank and Federal Reserve policy meetings, according to Societe Generale’s Bureau. Some investors are also taking positions as far as a year ahead in an effort to capture potential pricing dislocations.Risk-reversal measures, which provide an indication of options-market sentiment, have reached their most bearish level for one-month euro contracts since April. At the same time, one-month implied volatility has risen to its highest level in more than five months, signalling increased demand for protection against larger currency moves.Meera Chandan, co-head of global foreign-exchange strategy research at JPMorgan, attributed the recent pressure on the euro to a combination of a more hawkish repricing of Federal Reserve policy, wider spreads between French and other euro-area bond yields and weaker terms of trade.Higher European bond yields could also weigh on economic activity. ECB President Christine Lagarde said this week that rising yields were likely to slow both growth and inflation.Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole, said the euro remained vulnerable to geopolitical developments that are creating stagflationary pressures in the euro area and reducing the attractiveness of euro-denominated assets.