Option Bets Are Backing an End-of-year Dollar Rally by Hedge Funds

Hedge funds are increasingly backing the U.S. dollar in the options market, wagering that the greenback’s recent rebound against major global currencies will continue through the end of the year.

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According to traders, funds have stepped up activity in currency options this week, particularly targeting trades that benefit if the euro and yen weaken further versus the dollar. Data from the Chicago Mercantile Exchange Group shows that on Wednesday, trading volume for euro-dollar put options which gain value when the euro falls was roughly three times higher than that of comparable call options.

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“We’ve seen hedge funds taking tactical short-term positions in favor of the dollar,” said Mukund Daga, global head of currency options at Barclays Bank Plc, referring to contracts expiring before year-end.

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Daga noted that funds are broadly bullish on the greenback against most Group-of-10 currencies, with one exception: the Australian dollar, which has been supported by a more aggressive Reserve Bank of Australia. Investors have been buying vanilla dollar call options straightforward contracts that increase in value when the dollar strengthens as well as call spreads, which limit upside potential but reduce overall cost.

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The uptick in bullish dollar bets suggests that the recent bout of weakness, sparked by uncertainty surrounding the U.S. government shutdown, may have run its course. At the same time, several major currencies have come under pressure from domestic factors, further strengthening the dollar’s relative appeal.

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The euro has been dragged down by ongoing political instability in France, while the yen has slumped amid speculation that Japan’s next leader may prefer to slow the pace of interest-rate hikes. Meanwhile, the New Zealand dollar was hit hard after a 50-basis-point rate cut, signaling easier monetary policy ahead.

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“Most of the dollar call buying has been concentrated in the G-10 majors,” said Nathan Swami, head of FX trading for Asia Pacific at Citigroup Inc. “The sharp moves in short-dated risk reversals across these currencies highlight a clear shift in demand.”

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A risk reversal measures the price difference between a call option and a put option, serving as an indicator of market sentiment toward a particular currency pair. When call options become more expensive, it typically signals rising expectations for that currency to strengthen.

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Swami cautioned that it’s “still too soon to confirm whether the dollar has truly bottomed out.” However, Barclays’ Daga noted that he has observed increased interest in longer-term, lower-cost options designed to profit from an outsized dollar rally often referred to by traders as “tail risk” positioning.

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In Thursday’s Asian trading session, the Bloomberg Dollar Spot Index slipped 0.2%, but the gauge still hovered near its highest level since early August. The index, which tracks the performance of the U.S. dollar against a basket of major global currencies, has rebounded sharply from September’s lows.

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“The bigger picture here is that overall confidence in fiat currencies remains very weak,” Daga explained. “But among fiat options, the dollar continues to look like the safest hold.”

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The dollar’s appeal as a defensive asset has reemerged as global markets face diverging economic and policy trends. The Federal Reserve’s cautious stance on rate cuts, combined with continued strength in the U.S. economy, has made the greenback relatively more attractive than peers facing slower growth or policy uncertainty.

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At the same time, geopolitical tensions and fluctuating bond yields have pushed investors back toward the U.S. dollar, which remains the world’s preferred reserve currency. Hedge funds appear to be positioning for that momentum to extend, particularly as liquidity tightens heading into year-end.

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Analysts say the recent pattern of option activity particularly the surge in dollar call buying reflects renewed conviction that the greenback could regain its dominance. If global growth continues to cool while the U.S. economy remains resilient, the dollar could retain its strength well into early 2026.

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Still, traders remain cautious about calling a definitive bottom for the currency’s recent weakness. As Citigroup’s Swami pointed out, the coming weeks will be crucial in determining whether this shift in sentiment represents a sustained trend or merely a short-term tactical play.

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For now, the message from the options market is clear: professional investors are once again leaning toward the dollar, betting that it will outperform most major peers as the year draws to a close.

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