Hedge Funds Flood Short Euro Bets Amid French Fiscal Woes

Hedge funds have increased their use of options to bet on further euro weakness against the US dollar, citing elevated French fiscal risks and political uncertainty in Europe. According to a report by Bloomberg, 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 ending 1 October.

The euro fell to $1.1266 on Thursday, its lowest level since May 2025, after declining 2.5% against the dollar during September. 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.

France's unveiling of its 2027 budget on Thursday added another source of uncertainty, with the government seeking to fund a large budget deficit while also refinancing maturing debt. Investors are looking ahead to France's presidential election next year, with opposition parties having signalled limited willingness to compromise with President Emmanuel Macron.

Risk-reversal measures have reached their most bearish level for one-month euro contracts since April, while implied volatility has risen to its highest level in more than five months. Higher European bond yields could also weigh on economic activity, according to ECB President Christine Lagarde.