
US companies adopt options strategies to shield euro revenues in case dollar recovers
The euro rose against the dollar after the U.S. rolled out larger-than-expected tariffs in April, knocking the buck to a three-year low and raising concerns about U.S. assets, its exceptionalism and economic growth.
That rationale is being challenged with U.S. stocks (.SPX), opens new tab staging a 26% recovery from their April lows to rise 6.4% for the year, aided by postponements to the implementation of import tariffs, better-than-feared first-quarter earnings and positive economic data.
The options market reflects how investors and traders expect currencies to perform. Right now they are signaling less conviction in further dollar weakness, and some companies have been buying up euro put options that will appreciate if the euro weakens, to hedge their cash flow against euro weakness.
A weak euro could dampen earnings for U.S. companies if profits made overseas are repatriated at unfavorable exchange rates.
"Companies with euro revenues are saying, 'we got a great run, let's just make sure that we don't get hit hard on the downside'," said Eric Merlis, co-head of global markets, at Citizens in Boston, explaining some of his clients' thinking.
"There is not as much conviction around a continued run in the euro, so a little bit of protection is helpful."
Holders of put options have the right to sell the underlying currencies at a fixed price and date. They are typically bought to express a bearish view.
With currencies quoted in pairs, a bearish position on the euro indicates a view of dollar strength. Conversely, a euro call would gain value if the euro rises and is the same as a dollar put.
Euro/dollar options activity continued to surge in June, with $803 billion notional reported, but down from the previous high of $907 billion in April, according to data from Clarus, an ION company.
Traders and advisors said over the past three weeks, U.S. corporates expressed more interest in euro puts to set up for future earnings, reversing some of the short dollar trades that populated the market since tariffs were announced.
Traders said the market sees a lid on the euro between $1.18 and $1.20, compared to its current level around $1.16.
"The options market is unwinding to a lot of the short dollar positioning," said Garth Appelt, head of foreign exchange trading at Mizuho Americas, whose desk sold off all those trades last week.
"This whole theory of the U.S. exceptionalism not in play has not worked out since April," he added. "The dollar should weaken for many reasons, which are very centric to the U.S., but we don't have an alternative to growth pickup."
Data from CME Group showed the bulk of demand has switched to euro puts so far in July. Since March there had been more interest in euro call options on the exchange.
Meanwhile, the over-the-counter market showed that euro calls made up 58.73% of euro/dollar options transactions in June, down from the high of 60% seen in April, according to Clarus data. Euro puts were 41.26% in June, up from 39.96% in April.
Paula Comings, head of FX sales at U.S. Bank, said some of her healthcare clients started using zero-cost collars in late June to shield the revenues from Europe as persistent strength in the U.S. economy and robust employment numbers continue to defy earlier concerns about U.S. exceptionalism.
In this case, the collars involve the sale of euro call options to finance the purchase of euro puts up to two years out.
As Comings explained, a company wanting to sell euros for dollars a year from now can lock in a forward rate of $1.188, or use a zero-cost collar to cap the range between $1.2518 and a worst case $1.1338. In late February, it could have locked in a forward of $1.058, or used a collar between $1.0991 and $1.0049.
"It's really blown up in recent weeks. The dynamics are some of the best we've seen in 20 years," said Comings. "We have several others that are noodling on this."
Chris King, co-founder at advisory Dukes & King in London, is also seeing clients move to protect next year's budget with some of these strategies.
"If you're an American business, you haven't previously had a favorable spot rate," King said. "Now you've got the benefit of that spot move, combined with that yield curve benefit. So, if you're a U.S. seller of euros you can get a very favorable profile, particularly if longer dated."
The dollar has fallen 12% against the euro for the year.
With U.S. President Donald Trump delaying reciprocal tariffs to August 1, and remaining on the offensive with the European Union and other trading partners, currency markets could see more gyrations in coming weeks.
Conversely, Jackie Bowie, head of EMEA at Chatham Financial, a hedge adviser in the UK, said with the dollar historically low, U.S. companies could benefit the most from just buying in the forward market when converting cash flows back to dollars.
Still, a head of corporate derivatives at a large U.S. bank said of the zero-cost collars: "You're at this very attractive point for corporates who haven't seen a rate like this in many years."

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Reuters
2 minutes ago
- Reuters
Michelin posts H1 sales in line with market forecasts
April 24 (Reuters) - French tyre maker Michelin ( opens new tab reported a 3.4% decline in sales in the first half of the year, in line with market expectations, as a fall in sales volumes was partly offset by higher selling prices. The group confirmed its previous guidance for the full year, in the absence of any further deterioration in the economic environment in the second half of the year. Michelin's business continues to be impacted by a slowdown in the automotive market, especially in Europe. The group, which, at the end of last year, employed more than 23,500 people at its production sites across the U.S. and Canada has, since March, been facing tariffs imposed by U.S. President Donald Trump. It is looking at accelerating investments in the United States to counter the impact of tariffs. Sales fell to 13.03 billion euros ($15.33 billion) in the first half from 13.48 billion euros a year ago. That compared with the forecast 13.08 billion euros in a company-provided consensus. The company recorded a 6.1% drop in volumes, mainly in its original equipment sales. The impact from the U.S. tariffs were around 65 million euros in the first half of the year. They are expected to have an impact of around 200 million euros over the full year. "Our results have been severely penalised by the fall in volumes linked to our original equipment activities, whether in the automotive or truck sectors, or in a number of specialities, including heavy goods vehicles, agriculture and infrastructure," , Chief Financial Officer Yves Chapot said on call with journalists. "We have chosen to be as localised as possible, so 70% of what we sell in the United States is made in the United States" he added on the impact of tarrifs. ($1 = 0.8499 euros)


Reuters
2 minutes ago
- Reuters
US labor market steady, jobless claims at three-month low
WASHINGTON, July 24 (Reuters) - The number of Americans filing new applications for jobless benefits fell to a three-month low last week, pointing to stable labor market conditions, though sluggish hiring is making it harder for many laid-off workers to land new opportunities. The lack of material labor market deterioration likely gives the Federal Reserve cover to keep interest unchanged next week amid signs that President Donald Trump's aggressive tariffs on imports were starting to lift inflation. That was underscored by a survey from S&P Global on Thursday showing businesses asked higher prices for goods and services in July. Trump is pressuring the U.S. central bank to resume its interest rate cuts. Economists expect the Fed will keep its benchmark interest rate in the 4.25%-4.50% range after the end of a two-day policy meeting next Wednesday. The Fed cut rates three times in 2024, with the last move coming in December. "Trump 2.0 economic policies have not brought the economy to its knees yet although whether this continues to be the case going forward remains an open question," said Christopher Rupkey, chief economist at FWDBONDS. "The weekly jobless claims give Fed officials no cover whatsoever if they are seriously thinking of cutting interest rates at next week's meeting." Initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 217,000 for the week ended July 19, the lowest level since April, the Labor Department said. Economists polled by Reuters had forecast 226,000 claims for the latest week. Claims have declined for six straight weeks and have pulled further away from an eight-month high touched in June. Unadjusted claims decreased by 45,319 to 215,792 last week. Though there have been some layoffs, employers have been mostly reluctant to fire workers, opting instead to scale back on hiring while awaiting more clarity on the Trump administration's protectionist trade policy. Uncertainty over where tariff levels will eventually settle continued to weigh on business sentiment in July, the survey from S&P Global showed, even as activity picked up. The survey's measures of prices paid by businesses for inputs as well as what they charged for goods and services rose this month. S&P Global said about 40% of service providers reporting higher selling prices explicitly mentioned tariffs, while just under half of their counterparts in manufacturing blamed the import duties. Employment levels at businesses remained steady, the survey also showed, aligning with the low jobless claims data. Stocks on Wall Street were mixed. The dollar gained versus a basket of currencies. U.S. Treasury yields rose. There is still a chance that claims could push higher. Claims have tended to increase in July, in part due to the temporary motor vehicle assembly plant shutdowns, whose varied timing can throw off the model the government uses to strip out seasonal fluctuations from the data. Though job growth has slowed from last year, the labor market remains stable. Nonetheless, the hesitancy by businesses to boost hiring has left many of those who are out of work to experience long spells of unemployment. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 4,000 to a seasonally adjusted 1.955 million during the week ending July 12, the claims report showed. The so-called continuing claims covered the period during which the government surveyed households for July's unemployment rate. Continuing claims eased slightly between the June and July survey weeks. While economists said the elevated continuing claims reading posed an upside risk to the unemployment rate, they mostly expected it to hold steady at 4.1% this month. A decline in labor supply amid reduced flows of immigrants means the economy now only needs to create roughly 100,000 or fewer jobs per month to keep up with growth in the working-age population. The drop in the unemployment rate in June after holding at 4.2% for three straight months was mostly because people dropped out of the labor force. "Labor supply is growing much more slowly in 2025 due to immigration policy changes, so the unemployment rate can likely hold steady even if payrolls increase much more slowly in the second half of 2025 than in 2023 or 2024," said Bill Adams, chief economist at Comerica Bank. But high borrowing costs and economic uncertainty are hurting the housing market. New home sales increased 0.6% to a seasonally adjusted annualized rate of 627,000 units in June, a third report from the Commerce Department's Census Bureau showed. That was below economists' expectations for a rise to a rate of 650,000 units. Sales fell 6.6% on a year-over-year basis in June. The inventory of unsold homes on the market increased to 511,000 units, the highest level since October 2007, from 505,000 in May. That could make it difficult for builders to break more ground on new single-family housing projects. Government data last week showed single-family homebuilding dropped to an 11-month low in June while permits for future construction declined to more than a two-year low. Economists expect that residential investment, which includes homebuilding and home sales through broker commissions, likely remained a drag on gross domestic product in the second quarter. "We think renewed weakness in the housing sector this year, with residential investment likely to decline again in the second quarter, is the best evidence that rates are still at restrictive levels," said Veronica Clark, an economist at Citigroup.


Reuters
2 minutes ago
- Reuters
Upbeat ECB keeps rates steady, raising doubts about further easing
FRANKFURT, July 24 (Reuters) - The European Central Bank left interest rates unchanged on Thursday and offered a modestly upbeat assessment of the euro zone economy, raising doubts among investors about further policy easing even while U.S. tariff threats cloud the outlook. The ECB has cut its policy rate eight times since June 2024 after taming a surge in prices that followed the end of the COVID-19 pandemic and Russia's 2022 invasion of Ukraine. But the economy was now in a "good place" and growth is in line with projections or a "little bit better", ECB President Christine Lagarde said, bolstering market bets that the ECB may be done with cutting rates altogether. Financial markets which had fully priced in a rate cut this autumn just days ago now see only an 80% chance of a move, and even that may not come until the spring. Confirming waning appetite for rate cuts, sources close to the discussion said the bar for a move in September was high and would require weaker growth and inflation, along with lower staff projections. Lagarde herself took a more measured stance and would not be drawn into rate cut talk. "We are in this wait-and-watch situation," Lagarde told a press conference. "We are in a good place because our projections point to inflation stabilising at target in the medium term." She said the ECB's baseline projection for modest growth and inflation at its 2% target continued to hold, and that most data since the June data have confirmed that outlook. Lagarde's optimistic tone even prompted some economists to look again at their own projections. "We are revising our forecasts and no longer expect a final cut of the ECB deposit rate to 1.75% at the September meeting," Commerzbank economist Jörg Krämer said. "Now expect an unchanged deposit rate of 2.0% for the rest of this year and for 2026." Recent data suggest the economy is holding up well and fresh PMI surveys out on Thursday indicated an acceleration in business activity, led by a solid improvement in the dominant services industry and with manufacturing recovering. Euro zone banks have seen rising loan demand and policy uncertainty has not yet translated into an economic or market downturn even if some companies are starting to feel the pinch from tariffs in their profits. Trade negotiations still pose a risk and a final deal is far from certain, even as reports suggest that the two sides are moving closer on a possible agreement based on a 15% tariff on U.S. imports of EU goods. "We are attentive to where the negotiations are heading (but) we take the news one day at a time," Lagarde told a press conference. "The sooner this trade uncertainty is resolved, the less uncertainty we will have to deal with and that will be welcomed by many economic actors including ourselves." While the White House has dismissed the reports as speculation, 15% tariffs would be roughly halfway between the ECB's baseline and severe scenarios for the euro zone economy, presented last month, but milder than Trump's threatened 30%. The ECB's June estimate showed that higher U.S. tariffs would result in lower growth and - depending on any EU retaliation - lower medium-term inflation in the euro zone. Even the ECB's baseline projection from June, which incorporates 10% tariffs from the United States, saw price growth below 2% over the next 18 months. Lagarde acknowledged that scenario included the possibility of a temporary undershooting of the inflation target but said it was not a cause for concern. "With growth holding up and inflation at target, we believe the cutting cycle is drawing to a close," Konstantin Veit, a portfolio manager at PIMCO said. "The current 2% policy rate is likely a level considered the mid-point of a neutral euro area policy range by the majority of Governing Council members." Lagarde's upbeat assessment also pushed short-dated German bond yields to their largest daily rise in two months, as traders took it as a signal that another series of rate cuts next year might be unlikely. "Taking today's meeting at face value, the bar for yet another rate cut this year has clearly been raised," ING economist Carsten Brzeski said. "Still, we think that actual inflation could come in lower than the ECB expects and hard macro data could rather disappoint over the summer."