Dollar call options surge after Fed hawkishness

Hedge funds and currency traders sharply increased purchases of dollar call options after the Federal Reserve’s hawkish policy decision and comments by new Chair Kevin Warsh. Activity was concentrated in options on EUR/USD and GBP/USD and included both standard contracts and structured digital options.

Traders began buying calls immediately after the Fed’s policy announcement, and activity picked up after Warsh reiterated the Fed’s commitment to returning inflation to target. Market participants used a mix of outright long calls and more complex option structures to seek defined payoffs if the dollar strengthens. Tobias Jungmann, head of Americas FX options trading at Bank of America, noted: “There has been notable demand for dollar call positions, particularly against major Group-of-10 currencies.”

Exchange data showed a clear skew toward call activity. CME Group figures indicated call option volumes betting on dollar strength versus the British pound rose to more than five times put option volumes. Trading in euro-dollar options reached its highest level since early March, with large notional call trades outpacing bearish positions, according to Depository Trust & Clearing Corp. records. James Swindell, a trader at Barclays, observed: “Demand for bullish dollar exposure has been widespread, especially through EUR/USD and GBP/USD options structures.”

The flow reflected higher expectations for U.S. interest rates. Traders have priced in a greater probability of additional rate increases, with some models flagging a possible rise by October. Higher U.S. Treasury yields supported the dollar by making dollar assets comparatively more attractive to global investors.

The Dollar Spot Index has risen for several sessions and was on course for a weekly gain of about 1%, supporting demand for option contracts that profit from further dollar strength. Lower implied volatility in FX options reduced the cost of buying calls relative to potential upside, encouraging options-based strategies.

Positioning in the dollar-yen pair was more mixed. Some investors continued to bet on further yen weakness, while others bought protection against a reversal if Japanese authorities intervene. Japan’s finance ministry warned it stands ready to act after the yen fell to its weakest level against the dollar since mid-2024, a factor that influenced hedging and speculation in that cross.

Market participants noted central bank communications and the risk of currency interventions as elements that could prompt rapid repositioning in FX markets.