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Traders are betting that Donald Trump’s policies are likely to trigger a $7.5 billion daily foreign exchange (FX) market correction.
After years of positive momentum, the euro-dollar exchange rate plunged one year after the election. Hedge funds are collecting options contracts that pay off if currency fluctuations increase, and policymakers have revised their monetary policy accordingly.
While it is unclear how quickly Trump will implement policies like tariffs that could damage major currencies like the euro, investors are confident that uncertainty will be a key part of his policy. There is also uncertainty about how countries will react to Trump’s measures and the impact these restrictions will have on markets.
“This is an environment where foreign exchange markets are particularly attractive,” said Julian Weiss, head of vanilla G-10 foreign exchange options at Bank of America, adding that demand for longer-dated products has picked up. Weiss said, “All the hedge funds in the world, even those that focus on stocks, suddenly find themselves in the money.”
This trend shows a significant change from recent years, when the central bank raised and reduced interest rates at the same time, resulting in a quiet period. Now that Trump’s America First policies are expected to boost U.S. growth, traders are expecting the policy divergence between the Federal Reserve and its peers to widen, pushing major currency pairs, such as the euro-dollar, out of their strong range over the year.
Banks have cut their forecasts for the currency pair following the U.S. election, expecting further slide. “We expect Trump’s policies to create significant room for economic change, which will lead to larger currency movements,” said Dominic Bunning, head of G-10 strategy at Nomura.
The market’s assessment of a strong dollar under Trump also supports the argument for higher hedge costs, as does the correlation between the greenback and higher volatility when the U.S. currency is in high demand. Options traders at NatWest Group Plc say they are mostly betting on the movement of the euro, Australian dollar and yen against the dollar, while traders at UBS Group AG note that betting on the weakness of the Chinese yuan is also a popular play.
Henry Drysdale, head of FX options trading at NatWest, said, “The currencies most exposed to tariffs and Trump’s policies will continue to support it. Indeed, there is a risk that much of the expected disruption will be priced into the market by the time Trump takes office that the long-term change in the trade balance is smaller than expected.
That is what happened during the last Trump administration, in part because policies like tariffs took longer than expected to be implemented. At this point, Republican control of the House and Senate could mean that the plan will be implemented quickly and forcefully.
Then there was the unprecedented daily price action in response to the president’s constant tweets, a sentiment that traders remember vividly from his last speech. Deutsche Bank warned in a note to clients this week that the “best case” scenario of Trump implementing his worst-case strategy would only see a 30% increase in the stock market.
“2025 will be a year of change and uncertainty,” said Shahab Jalinoos, global head of financial research at UBS. “We don’t know what will happen under Trump and there are a lot of uncertainties,” Jalinoos said.
