European Currencies Outperforming
Global markets face pressure with a notable sell-off in US assets, leading to a decline in the dollar. This is linked to recent tariff threats from Trump and geopolitical tensions ahead of Davos. Notably, European currencies are performing well, with the Swiss franc gaining 1%. Rising gold prices and increased FX volatility suggest expectations of further USD depreciation, with potential targets for the DXY index around 97.75–98.00.
The sell-off includes a sharp decline in the USD, extending from earlier weakness due to the president’s tariff and Greenland comments. Core European currencies outperform, with the CHF seeing notable gains, while emerging market currencies lag. Gold rises by 1.4%, reflecting its status as a safe haven, adding to the dollar’s challenges. FX volatility increases, indicating anticipation of further USD drops.
Positioning data reveals a reduction in USD exposure, now merely overweight compared to benchmarks. This situation could lead to continued USD weakening, particularly if US policies prompt portfolio rebalancing away from US assets. Significant losses in the DXY point towards a potential retest of levels around 97.75 in the short term.
It feels like a ‘sell everything’ mood is taking over, but the focus is clearly on US assets. The dollar is extending its slide, driven by renewed tariff threats just ahead of the Davos summit. We anticipate the Dollar Index (DXY) will test the critical 97.75–98.00 support zone, a level we last saw during the lows of late 2025.
The jump in foreign exchange volatility signals that traders are bracing for bigger swings in the dollar. The Cboe Volatility Index (VIX) has surged past 18, a sharp increase from the calm we saw in the final quarter of 2025 when it averaged around 14. This environment favors buying options, such as straddles on major currency pairs, to profit from the expected turbulence.
Seeking Safety Outside The Dollar
Investors are clearly seeking safety outside of the dollar, which is why gold is surging past $2,420 an ounce to new highs. The Swiss franc is the standout performer in the currency market, with USD/CHF breaking decisively below the 0.9000 psychological level. This indicates a strong preference for non-US havens, which should continue to weigh on the dollar.
We should consider positioning for further dollar weakness through options on the euro, as EUR/USD pushes higher. The options market is now pricing a higher premium for puts on the dollar versus calls, a clear sign that sentiment has shifted. This suggests buying call options on EUR/USD to capture upside potential is a strategy worth exploring.
This dollar sell-off may have more room to run, as large speculators are only just starting to unwind their bullish bets. While positioning is no longer extremely long the dollar as it was late last year, recent CFTC data shows traders are still holding more long USD positions than average. This leaves plenty of fuel for further selling as these positions are closed out.
