The common currency headed for a third daily drop as it weakened by 0.2% to $1.1426. Options gauges show sentiment turning increasingly bearish, with positioning into year-end near levels last seen in mid-August.
The move comes as markets price further Fed tightening, eroding the policy-divergence theme that supported the euro through much of the summer. Persistently high energy prices have added another headwind by weighing on the euro area’s growth outlook, even as oil headed for a sixth straight daily decline.
Data from the Depository Trust & Clearing Corporation show the shift accelerated after last week’s Fed decision. Options exposure was almost evenly split following the European Central Bank’s latest rate increase, but since the Fed meeting, around 60% of total notional has been positioned for euro weakness.
ECB Governing Council member Joachim Nagel said officials may have to raise interest rates to levels that restrain economic growth if elevated energy prices persist. They may “have to go into the mild restrictive territory of monetary policy,” he said.
The contrast with the US economy remains supportive of the dollar. While tightening by other major central banks may limit the scope for the greenback to reach new cyclical highs, “the US growth advantage relative to other major economies skews dollar risk to the upside,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman in London.
DTCC data also suggest euro hedges are moving further out the curve. Since the Fed meeting, the weighted-average expiry of euro-bearish exposure has lengthened by more than 10%, while lower strikes have attracted increased interest.
Political uncertainty is adding to the pressure. France faces another difficult budget fight in a fragmented parliament, while Chancellor Friedrich Merz’s Christian Democrats are dealing with the fallout from their worst-ever result in a German state election.
Morgan Stanley strategists, including global head of macro strategy Matthew Hornbach, said higher US rates and a euro-negative political risk premium make gains against the dollar more difficult.
Deutsche Bank sees less scope for an extended decline. Its analysts expect the euro to remain range-bound against the dollar, arguing that resilient global growth and significant dollar tail risks should limit euro weakness, while Fed rate increases and elevated energy prices cap the upside.
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