Rising political and fiscal risks in France have prompted hedge funds to aggressively position in options, betting on and profiting from a depreciation of the euro against the US dollar.

Data from the US Depository Trust & Clearing Corporation shows that on Wednesday, for euro-dollar options with a notional principal of 100 million euros (equivalent to 113 million US dollars) and above, put option volumes were more than double those of call options. Put options appreciate when the euro falls, while call options move in the opposite direction. Data from CME Group shows that on Tuesday, put option volumes were approximately 2.5 times those of call options.

Thomas Bury, Global Head of FX Options Trading at Societe Generale, said: "Over the past few trading sessions, the preferred vehicle for long-dollar trades has undoubtedly been euro-dollar." He noted that Tuesday's market standout feature was not only directional demand betting on a weaker euro, but also buying interest spanning all tenors.

Hedge funds concentrated on 1-month options, covering the next round of ECB and Federal Reserve policy meetings; while volatility relative-value trading accounts using spread arbitrage were active around the 1-year point on the far end of the curve.

In September, the euro fell 2.5% against the US dollar, marking its worst monthly performance since July 2025, with France's escalating political and fiscal risks being one of the core catalysts. As France's presidential election approaches next year, opposition parties are signaling reluctance to compromise with President Macron, keeping investor sentiment tense.

The French debt agency announced plans to issue record-scale bonds in 2027 to cover fiscal deficits and refinance maturing debt. The French government will unveil its 2027 budget proposal on Thursday.

Meera Chandan, Co-Head of Global FX Strategy Research at JPMorgan in London, said the drivers behind the euro-dollar move include: the market repricing Federal Reserve policy with a more hawkish expectation, which euro-dollar had not fully reflected previously; alongside widening French government bond yield spreads and deteriorating terms of trade.

ECB President Christine Lagarde said this week that rising bond yields will dampen economic growth and slow inflation, further weighing on euro-dollar.

Julian Weiss, Head of G10 FX Options Trading at Bank of America in London, said market demand for euro-dollar downside options is rising, with tenors extending from the short end to summer 2027, covering potential volatility during next year's European election cycle. "Both hedge funds and long-only investors are increasing demand for euro put options," he said. "With pressure in rate markets compounded by Europe's external energy dependence, among G10 currencies, euro-dollar has become the preferred vehicle for long-dollar positioning."