The options market's outlook on the US dollar has never been this pessimistic
Data from the foreign exchange options market shows that traders' pessimism about the dollar's performance over the next year has reached the highest level on record. The 1-year risk reversal indicator, which measures the cost difference between buying and selling a particular currency in the options market, has fallen to -27 basis points. Market participants currently hold about $16.5 billion in positions betting on a decline in the dollar, nearly reaching the highest level since September
As Trump's erratic tariff policies and the expanding fiscal deficit raise market concerns, options traders' bearish outlook on the dollar has reached unprecedented levels.
According to media reports on May 21, data from the foreign exchange options market shows that traders' pessimism about the dollar's performance over the next year has hit a record high. The one-year risk reversal indicator, which measures the cost difference between buying and selling a currency in the options market, has fallen to -27 basis points, indicating a clear preference for put options over call options.
Reports indicate that the Bloomberg Dollar Spot Index has fallen more than 6% so far in 2025, marking the worst annual start for the index in twenty years. Data shows that market participants currently hold about $16.5 billion in positions betting on a decline in the dollar, nearly reaching the highest level since September. As of Wednesday's Asian trading session, the dollar index has once again fallen below the 100 mark, down nearly 10% from its year-to-date high.
The core trigger for the collapse of confidence in the dollar lies in the uncertainty of U.S. policies. Trump's erratic tariff policies are severely disrupting market expectations, leading investors to question the predictability of U.S. policymaking and the outlook for economic growth. Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, bluntly stated:
The structural bearish view on the dollar remains, as the easing of tariff tensions is only temporary.
Meanwhile, the deteriorating fiscal situation in the U.S. has also intensified market concerns about the dollar.
Congress is currently advancing Trump's massive tax cut plan, which will further expand the already high federal deficit. Moody's downgraded the U.S. to a AAA credit rating last Friday evening, citing a significant increase in government debt and interest payments over the past decade.
For investors, this unprecedented bearish sentiment towards the dollar suggests that U.S. assets may face further outflow pressure, while also indicating that global portfolio allocations may need to increase exposure to alternative currencies such as the euro and yen.
However, some analysts also warn that such extreme bearish sentiment can sometimes signal an impending rebound for the dollar, as excessive pessimism may create opportunities for contrarian trading
