US-EU trade tensions are impacting the financial markets, causing a decline in global equity and bond markets. At the same time, gold prices are reaching new highs. Unusually, the US Dollar (USD) is falling against most major currencies, especially the Euro (EUR). The EUR/USD pair has risen nearly 1.5% since the start of the week. The USD’s weakness is linked to more foreign exchange hedging by non-US entities that hold US dollar assets. It’s not a result of a decline in American investments. Recent data from the US Treasury International Capital revealed that foreign entities added a record $1,569 billion in long-term US securities over the past twelve months. Since the Eurozone holds 21% of US Treasuries, any sales by Eurozone investors will have little impact on Treasury yields.

Challenges to the USD as Reserve Currency

Looking long-term, a loss of trust in US trade and security policies, along with challenges to the Federal Reserve’s independence, could weaken the USD’s role as the main reserve currency. This could create persistent downward pressure on the USD. In the short term, the USD is likely to continue trading within a set range, as the Fed has room for more rate cuts while most major central banks have finished easing. Reflecting on the US-EU trade tensions in early 2025, there was a significant risk-off period when the US dollar weakened against the euro. Though these tensions eased following diplomatic talks at the Transatlantic Trade and Technology Council last quarter, the underlying risk of political conflict remains. This suggests that new trade disputes could lead to a sharp market reaction. The dollar’s weakness during that 2025 period was due to foreign investors hedging their US asset holdings, not a fundamental exit from the dollar. This trend appears to be continuing, as the most recent Treasury International Capital (TIC) data for November 2025 showed that foreign net purchases of long-term US securities remained strong at $82.1 billion. This indicates ongoing foreign interest in US assets, supporting the dollar against structural concerns.

Market Strategies Amidst Currency Fluctuations

With market complacency returning and the Cboe Volatility Index (VIX) currently around a low of 13.5, option premiums are relatively cheap. Traders should think about buying protection against sudden geopolitical or trade risks. Purchasing out-of-the-money puts on equity indices or calls on gold could provide affordable insurance for portfolios. The EUR/USD pair, which soared to nearly 1.12 during the 2025 trade concern, has since stabilized around 1.09. However, potential policy differences between the Federal Reserve and the European Central Bank could create an opportunity for a breakout. A long strangle options strategy on EUR/USD could be a smart way to prepare for a significant move in either direction without guessing what will trigger it. The Fed’s approach has become more data-dependent since last year, with recent US CPI data showing inflation steady at 2.9%, making further rate cuts unlikely for now. In contrast, Eurozone inflation is lower at 2.4%, giving the ECB a somewhat softer stance. This divergence indicates that the dollar may trend higher in the near term, reversing the trend seen in early 2025. Since the Fed can now cut rates less than it could a year ago, the dollar’s downside seems more limited. Traders might consider strategies that perform well in a range-bound or slightly higher dollar environment. Selling cash-secured puts on dollar-tracking ETFs could generate income while positioning for ongoing dollar stability against other major currencies. Create your live VT Markets account and start trading now.

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