Key Takeaways
- • The euro fell as much as 0.7% against the dollar to $1.1176 and 0.4% against sterling to 84.48 pence on Wednesday, the currency's lowest level against sterling since June 2025 and a 16-month low.
- • Hedge funds and other currency traders are increasingly betting on further euro weakness, using euro crosses and favoring the Swiss franc and yen, followed by sterling and the dollar, according to currency traders familiar with the transactions.
- • Concerns over France's deteriorating public finances, rising government bond yields, and political instability ahead of the presidential election are the main drivers, with the selloff in European government bonds last week reviving broader debt-vulnerability concerns.
- • Markets have pared expectations for ECB tightening: interest-rate swaps now price three quarter-point hikes by September 2027, down from four at the start of the prior week.
- • Options markets confirm the shift, with the cost of hedging euro-yen swings exceeding dollar-yen by more than 100 basis points for the first time since March 2025, and one-month euro-sterling risk reversals turning in sterling's favor for the first time since August 2024.
Summary
Hedge funds and other currency traders are increasingly positioning for further euro weakness as concerns over France's public finances and rising political uncertainty weigh on the common currency, according to Bloomberg. On Wednesday the euro fell to a 16-month low against sterling and approached its weakest level in a year against the yen. The currency dropped as much as 0.7% against the dollar to $1.1176 and fell 0.4% against sterling to 84.48 pence, its lowest level since June 2025. It had also reached a 17-month low against the dollar earlier in the week.
France's fiscal position has become a central source of investor concern, with rising government bond yields and renewed fears of political instability adding pressure. Jane Foley, strategist at Rabobank, said the prospect of further political disruption ahead of France's presidential election has heightened uncertainty. The pressure has spread beyond French debt markets. A selloff in European government bonds last week revived concerns about the region's debt vulnerabilities, and political developments elsewhere in Europe, including Spain's call for snap elections, have added another layer of uncertainty for currency investors.
Positioning data point to a deliberate strategy. Hedge funds have increasingly used euro crosses to express bearish views, favoring the Swiss franc and yen, followed by sterling and the dollar, according to currency traders familiar with the transactions. This approach allows investors to isolate euro-specific risks while avoiding some of the uncertainty surrounding the dollar and the US fiscal outlook. Morgan Stanley strategists led by David Adams have recommended selling the euro against the Australian dollar and Swiss franc, citing European fiscal and political risks and the possibility of a more dovish European Central Bank if bond-market volatility persists.
Expectations for ECB tightening have also been scaled back. Interest-rate swaps now price in the equivalent of three quarter-point increases by September 2027, down from four as recently as the start of the prior week. The options market reflects the same repositioning. The cost of hedging euro-yen swings has risen above the cost for dollar-yen by more than 100 basis points, the first time that gap has opened since March 2025. One-month euro-sterling risk reversals have moved in sterling's favor for the first time since August 2024.
France's fiscal position has become a central source of investor concern, with rising government bond yields and renewed fears of political instability adding pressure. Jane Foley, strategist at Rabobank, said the prospect of further political disruption ahead of France's presidential election has heightened uncertainty. The pressure has spread beyond French debt markets. A selloff in European government bonds last week revived concerns about the region's debt vulnerabilities, and political developments elsewhere in Europe, including Spain's call for snap elections, have added another layer of uncertainty for currency investors.
Positioning data point to a deliberate strategy. Hedge funds have increasingly used euro crosses to express bearish views, favoring the Swiss franc and yen, followed by sterling and the dollar, according to currency traders familiar with the transactions. This approach allows investors to isolate euro-specific risks while avoiding some of the uncertainty surrounding the dollar and the US fiscal outlook. Morgan Stanley strategists led by David Adams have recommended selling the euro against the Australian dollar and Swiss franc, citing European fiscal and political risks and the possibility of a more dovish European Central Bank if bond-market volatility persists.
Expectations for ECB tightening have also been scaled back. Interest-rate swaps now price in the equivalent of three quarter-point increases by September 2027, down from four as recently as the start of the prior week. The options market reflects the same repositioning. The cost of hedging euro-yen swings has risen above the cost for dollar-yen by more than 100 basis points, the first time that gap has opened since March 2025. One-month euro-sterling risk reversals have moved in sterling's favor for the first time since August 2024.
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