Bearish sentiment exploded: USD hedging costs rise to highest since 2011 or drop to four-year lows.

With the highly turbulent political environment in the United States sparking a rush towards short positions in the market, dollar traders are betting at record cost that the dollar will see further declines. Short-term option premiums that can profit from a weaker dollar have expanded to their highest levels since data has been available since 2011. The bearish sentiment is not limited to the short end - investors' pessimism about the long-term prospects of the dollar has reached at least the highest level since May 2025. Despite a slight increase in the US dollar index on Tuesday, its consecutive three-day decline prior to that was the largest since the tariff turmoil in April last year. If the downward trend reopens as indicated by option prices, the dollar could fall to its lowest level in four years. Danish bank senior analyst Jesper Fjarstedt said: "The unpredictable US political situation is undoubtedly unfavorable for the dollar. The developments of the past week have prompted the market to reassess political risk premiums." So far this year, the dollar has been the worst performer among the Group of Ten (G10) currencies, indicating that investors' perception of this traditional safe haven asset is undergoing a change. Concerns about the rising US fiscal deficit, sanction risks, and trade frictions, as well as investors accelerating their diversification into gold and other reserve assets, are collectively putting pressure on the dollar. Behind the current trend of the dollar is not only a change in sentiment, but also a large amount of capital flows. On Monday, trading volume through the US Depository Trust & Clearing Corporation (DTCC) reached the second highest in history, second only to the sell-off on April 3, 2025. In terms of a four-day rolling average, market participation has reached an all-time high. Moreover, market positioning is highly one-sided. Since last Thursday, about two-thirds of options trading in the euro and Australian dollar are betting on a further weakening of the dollar. In addition, speculation about the possibility of the United States cooperating with the Japanese monetary authorities to set a floor for the continually declining yen has exacerbated the dollar's downward trend. It was reported that the New York Fed called financial institutions last Friday to inquire about the yen exchange rate, which Wall Street interpreted as a sign that the Fed is preparing to assist Japanese officials in directly intervening in the currency market to support the yen. The market is currently speculating that the US and Japanese authorities may jointly intervene, in a rare move, to prevent the yen from further falling. Bank of America Securities said that the US may aim to boost its trade competitiveness by suppressing the dollar's exchange rate. In this scenario, market anxiety is having an impact on hedge costs - one-month dollar volatility has soared to its highest level since early September. At the same time, "butterfly options" (used to measure demand for protection against extreme price fluctuations) have risen to a seven-month high, indicating that traders are preparing for the dollar to break through its recent range of volatility.