French budget and election risks peaked, the euro hit its worst monthly performance in more than a year, and hedge funds followed the trend and increased bearish bets

The Zhitong Finance App learned that as France's political and financial risks continue to increase, hedge funds are buying options in a big way and betting on the decline in the exchange rate of the euro against the US dollar to obtain profits.

According to data from the Depository Trust and Clearing Corporation (DTCC), the volume of EUR/USD put options with a nominal value of 100 million euros (US$113 million) or more was more than double that of call options on Wednesday. CME (CME) data showed that the volume of put options traded was about 2.5 times that of call options on Tuesday.

Thomas Bureau, head of global foreign exchange options trading at Societe Generale SA (Societe Generale SA), said, “In the past few trading days, when trading long on the US dollar, EUR/USD is undoubtedly one of the preferred targets in the market.”

He said that the highlight of Tuesday's market was not only the directional demand for the euro's downside, but also the extent to which buying behavior spanned various periods. He said that hedge funds are mainly focused on a one-month period to cover the next ECB and Federal Reserve meetings, while volatility relative value strategy accounts that rely on spread arbitrage are active on a more remote curve and focus on one-year varieties.

In September, the euro fell 2.5% against the US dollar, the worst monthly performance since July 2025. France's increasing political and fiscal risks are one of the main reasons.

Investors are nervous about the country's presidential election next year, as opposition parties have sent signals that they are unwilling to compromise with President Emmanuel Macron.

The French debt agency announced plans to issue a record amount of bonds in 2027 to finance budget deficits and replace maturing debts. The government is due to announce the 2027 budget on Thursday.

Meera Chandan, co-head of global foreign exchange strategy research at J.P. Morgan Chase in London, said that the drivers of the EUR/USD trend “include the market's hawkish repricing of the Fed's policy — EUR/USD has not kept up with this change until now — and the widening of French treasury bond yield spreads and deteriorating terms of trade.”

ECB President Lagarde said this week that rising bond yields will curb economic growth and slow inflation, putting further pressure on the euro against the US dollar.

Julian Weiss, head of foreign exchange options trading at the Bank of America Group of Ten (G-10) in London, said that market demand for EUR/USD downside options is rising, extending from a shorter date until the summer of 2027, thus covering the fluctuations that may be caused by next year's European election cycle.

He added: “We are seeing an increase in demand for euro put options in both hedge funds and real capital. Given the pressure on the interest rate market and Europe's dependence on energy, EUR/USD has always been the preferred tool among G-10 currencies to go long on the dollar.”