Insights 
VT 
EUR/USD rose in Asia as USD hedging costs for eurozone investors dropped to 1.85% from 2.40%, increasing demand for the currency. Eurozone investors hold over €2.3 trillion in U.S. debt, so even small increases in hedge ratios could lead to dollar selling, pushing the currency pair toward the 1.1655–1.17 resistance zone.
Softer energy prices have improved the eurozone’s terms of trade to the highest levels this year, positively affecting its external accounts. The hedging costs for eurozone residents insuring against FX losses on U.S. assets have fallen to 1.85% p.a. from 2.40% in July. This 55bp reduction is impactful for bond investors seeking conservative returns, given eurozone investors’ substantial holdings in U.S. sovereign debt and other securities.
Focus on Ukraine Peace Talks
In Europe, attention is on Ukraine peace talks, with little progress in recent US-Russian discussions. A key focus is the European Commission’s proposal to use frozen Russian assets to support Ukraine financially. A move through the 1.1655/70 exchange rate area, aided by softer US data, could lead EUR/USD to reach 1.17, with a year-end target of 1.18 remaining.
We are seeing a continuation of the trend that began back in late 2024, when the cost for Eurozone investors to hedge their U.S. dollar exposure fell sharply. That drop from 2.40% to 1.85% has accelerated through 2025, with recent data showing 3-month hedging costs now sit near 1.25% following the Federal Reserve’s rate cuts in September and November. This ongoing compression makes it increasingly attractive to hold hedged U.S. assets, which supports the euro.
The sheer scale of these holdings makes even small adjustments significant for the currency market. We noted last year that Eurozone investors held about €2.3 trillion in U.S. debt, and recent Q3 2025 figures from the European Central Bank show this has grown to nearly €2.5 trillion. A continued increase in hedge ratios on this massive portfolio will require consistent selling of dollars, providing a strong underlying bid for EUR/USD.
Focus on Eurozone
Fundamentally, the Eurozone’s terms of trade remain favorable, a theme that has persisted all year. Brent crude prices, which were a concern in late 2024, have stabilized around $75 a barrel through this fourth quarter, easing pressure on the Eurozone’s import bill. This has helped push the EUR/USD pair comfortably above the 1.1800 level we had previously targeted.
Given this environment, traders should consider positioning for further upside in EUR/USD. Buying call options with strike prices targeting the 1.2100 level for the first quarter of 2026 could be a prudent strategy. Implied volatility has remained subdued, making option premiums relatively cheap to own for capturing the next leg higher.
The divergence in central bank policy is now the primary driver, as the Fed is actively easing while the ECB remains on hold. Looking back, the approval in mid-2025 of the plan to use frozen Russian assets to fund Ukraine also provides a subtle, structural support for the euro. In the coming weeks, any U.S. data that reinforces expectations for more Fed cuts will likely propel the pair higher.
