(Bloomberg) — Traders are seeking alternatives to the euro when shorting the dollar as they look to capitalize on expectations for further weakness in the US currency.
Long euro positions against the greenback remain in favor due to optimism over increased defense spending in the single-currency region. Traders though are looking to bet currencies such as the Chinese yuan, Australian dollar and South Korean won will strengthen versus their US peer on expectations the Federal Reserve will resume interest-rate cuts and as American exceptionalism fades.
Dollar-yuan option trading volume on the Depository Trust & Clearing Corp. climbed to a one-month high last week with investors paying a premium to speculate on downside moves in the pair versus upside ones. Volumes in Australian dollar call options, which gain if the currency rises against the greenback, were nine times greater than puts, data from the Chicago Mercantile Exchange Group’s central limit order book showed July 1.
“The most recent demand in FX options has been a play in USD/CNH lower via dollar put digitals,” as well as other downside option structures, said Mukund Daga, head of foreign-exchange options for Asia at Barclays Bank in Singapore. “This has been on the back of the most recent truce pact” that US President Donald Trump has signed with China, he said.
A put digital option refers to a strategy that offers a fixed payout if the currency pair falls below a predetermined level when it expires.
There’s also an increased interest in bullish option structures for the Korean won, Daga said.
Hedge funds are betting the won may replicate the Taiwan dollar’s surge in early May, when the central bank allowed its currency to appreciate to help reach a trade deal with the US. The removal of political uncertainty in South Korea may also help support the won.
What Bloomberg Strategists Said…
“A weaker dollar and a steady, gradually appreciating yuan have underpinned KRW gains in recent weeks despite tariff risks. From a valuations lens, the won remains competitive. Its real effective exchange rate is still cheap relative to historical averages, leaving room for further appreciation without threatening export dynamics.”
— Mary Nicola, Macro Strategist, Singapore
While long euro trades are still popular, interest in the Australian dollar is growing, according to Troy Fraser, head of foreign-exchange sales for Australia and New Zealand at Citigroup Inc.. “We have seen interest mainly from hedge fund clients to put on AUD/USD topside in the short tenors over the past few weeks,” he said.
One currency that traders appear less enthusiastic about is the yen. Appetite for long positions in the currency cooled after it tumbled versus the dollar in parts of May and June.
“USD/JPY short has certainly been a widow-maker,” said Antony Foster, head of Group-of-10 spot trading at Nomura International Plc in London. “There are trade talks and politics involved which, once resolved, might help USD/JPY revert lower again, but whilst the risk is there, people are reluctant to really involve themselves.”
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