Hedge funds ramp up euro short bets on France fiscal strain

Hedge funds have increased options bets and purchased euro puts to position for further euro weakness amid rising concerns over France’s fiscal position, a planned large bond issuance and next year’s presidential vote.

Data from the Depository Trust & Clearing Corporation showed large options trades betting on a decline in the euro outnumbered those positioned for gains by more than two-to-one over the two days to Oct. 1. Traders report higher demand for euro puts among hedge funds and traditional asset managers, with activity focused on short-dated contracts and positions stretching into mid-2027.

The euro fell to $1.1266 on Thursday, its weakest level since May 2025, following a 2.5% slide against the dollar in September, the currency’s poorest monthly performance since July 2025. Market participants point to expectations of higher U.S. interest rates and widening French bond spreads as key factors behind dollar strength.

France unveiled its 2027 budget this week, proposing a record €340bn of bond issuance to refinance maturing debt and cover a large deficit. Officials say the borrowing plan will prompt a heated political debate and could increase pressure on Prime Minister Sébastien Lecornu’s government. Investors are also monitoring next year’s presidential election, where some opposition parties have signalled limited willingness to strike deals with President Emmanuel Macron.

Hedge funds have been particularly active in one-month options that cover upcoming European Central Bank and Federal Reserve policy meetings, while some managers are taking positions as far out as a year to capture potential pricing gaps around the 2027 political calendar. Julian Weiss, Bank of America’s head of G-10 FX options trading in London, noted increased demand for both short-dated protection and contracts spanning the election period.

Options-market indicators reflect the shift in positioning. One-month risk-reversal measures for the euro reached their most bearish level since April, and one-month implied volatility rose to its highest point in more than five months, signalling stronger demand for downside protection.

Stress in European bond markets has added pressure on the currency. Measures of French sovereign risk have climbed to levels not seen since the euro-area debt crisis in 2012. Rising energy prices tied to the conflict in the Middle East have raised inflation concerns and highlighted Europe’s reliance on external energy supplies.

Meera Chandan, co-head of global FX strategy research at JPMorgan, attributed recent euro weakness to a hawkish repricing of Federal Reserve policy, wider French bond spreads versus other euro-area yields and weaker terms of trade. European Central Bank President Christine Lagarde warned rising yields are likely to slow both growth and inflation. Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole, said geopolitical developments are creating stagflationary pressures and reducing demand for euro-denominated assets.