Laura Matthews and Saqib Iqbal Ahmed

Tue, Jun 3, 2025, 3:01 AM5 min read

By Laura Matthews and Saqib Iqbal Ahmed

NEW YORK (Reuters) -The U.S. dollar has steadied after a sharp tumble this year but traders in the foreign exchange options market are positioned for the U.S. currency to weaken further amid growing concern about the U.S. economy and persistent trade-related tensions.

Investors started the year expecting the Trump administration's policies to boost the dollar, helped by his tax cuts and safe haven demand stemming from protectionist policies.

But that view quickly soured when U.S. President Donald Trump unveiled levies in April that were larger and broader than anticipated, spiking volatility and sending the dollar to a three-year low.

While a temporary pause in some of the reciprocal tariffs has helped calm nerves, the options market still paints a dour outlook for the dollar.

The options market can offer a view on how investors and traders expect currencies to fare months down the line.

"FX option prices in general continue to point to a greater risk of further dollar weakening," said Tim Brooks, head of FX options at Optiver. "From our perspective there is no clear single large position, but relative to the past 5-10 years, we see unprecedented demand from investors to own USD puts in comparison with at-the-money options or USD calls."

Put options confer the right to sell the underlying security at a fixed price and date and are typically bought to express a bearish view. Their bullish counterpart is the call option, which grants the right to buy at a set price and known time frame.

Because the foreign exchange market quotes currencies in pairs like dollars per euro, and yen per dollar, a bullish position on the euro indicates a bearish view on the dollar.

FX risk reversals, a type of options strategy that involves the simultaneous purchase of a put option and sale of a call, or vice versa, are useful indicators of which currency is seeing more demand. Pricing on several of these currency pairs remains near multi-year highs despite the pause in the dollar's slide this year, highlighting the market's bearish stance on the buck.

According to LSEG data, the three-month, six-month, and one-year 25-delta EURUSD at-the-money risk reversal measures just edged off their highest level of bullishness for the euro against the dollar on records dating to 2007, apart from a brief interlude during the 2020 pandemic's market disruption.

"Positioning remains extremely bearish on the dollar," Karl Schamotta, chief market strategist at Corpay, said.