Cost of Hedging the Euro Hits Highest Level in 7 Years on Eve of U.S. Election

The relative cost of hedging the euro rose to its highest level since 2017 on Oct. 24, on the eve of the U.S. presidential election. The relative cost of hedging the euro has not reached such a high level since the tumultuous French election in 2017, which some fear could damage the euro. If the so-called relative premium is positive, it suggests that the cost of hedging is overvalued. Investors are buying safe-haven assets because of the different pace of interest rate cuts in Europe and the US. The euro's implied volatility posted its eighth-largest one-day gain since Europe's sovereign debt crisis as weakness in the eurozone economy spurred bets that the European Central Bank would cut rates sharply, and as investors bet that Trump's election could reignite higher inflation, which would then lead to a Federal Reserve rate hike and a further strengthening of the U.S. dollar. The market expects the euro to fall to 1.05 against the dollar if the greenback resumes its uptrend, according to the American Depository Trust & Clearing Corp, while market analysts believe the pair could fall all the way to parity.