Dollar call options surge after Fed hawkish signals

Hedge funds and currency traders increased purchases of U.S. dollar call options after the Federal Reserve’s policy decision this week, with activity rising further after remarks by new Fed Chair Kevin Warsh. Most buying targeted the euro and the British pound.

Traders began accumulating dollar call positions soon after the Fed announcement and continued into Thursday as Warsh emphasized the central bank’s commitment to returning inflation to target. Tobias Jungmann, head of Americas FX options trading at Bank of America, noted strong demand for dollar calls against major Group-of-10 currencies and added that relatively low implied volatility made options-based bullish dollar trades more attractive.

Exchange data showed concentrated activity in specific pairs. CME Group figures indicated call option volumes betting on dollar strength versus the British pound exceeded put volumes by more than five times. Depository Trust & Clearing Corp. figures showed euro-dollar option trading at its highest level since early March, with large notional call trades outpacing comparable bearish positions.

Barclays trader James Swindell described demand as widespread, pointing to activity in both standard contracts and digital options that pay out once a specified price level is reached.

Market pricing reflected higher expected U.S. interest rates, with investors increasingly expecting tighter policy and a possible rate hike by October. The dollar spot index rose for three straight sessions and was on track for about a 1% weekly gain. U.S. Treasury yields climbed, raising the return on dollar-denominated assets for global investors.

Positioning in the dollar-yen pair was mixed. Some traders wagered on further yen weakness while others hedged for a potential reversal if Japanese authorities intervened. Japan’s finance ministry warned it was prepared to take decisive action after the yen fell to its weakest level against the dollar since mid-2024, adding uncertainty for that pair.

Call options give the buyer the right to benefit if the dollar strengthens past a set level by a specified date; lower implied volatility reduces option premiums. Traders used a mix of vanilla options and structured products, including digital options, to gain exposure.