The weakening US dollar pushes up hedging costs in the foreign exchange market, leading to an unusually sharp increase in currency volatility.

The continuous depreciation of the US dollar is driving up the hedging costs for global currency trading, breaking the market consensus that "hedging costs often decrease when the US dollar weakens." This week, the correlation between the US dollar and a key indicator tracking G10 currency volatility has fallen to the lowest level in seven yearswhile for most of the past 15 years, this correlation has been positive. This structural shift indicates that traders are preparing for more intense market volatility, rather than expecting stability as usual when the US dollar weakens. Depository Trust & Clearing Corporation (DTCC) data shows a surge in forex options trading volume this year, with daily average volume since January exceeding the 12-month average. Goldman Sachs analyst Kamakshya Trivedi said, "Actual foreign exchange volatility is at high levels, and I believe this high volatility may continue for some time." The dynamics in the spot and options markets this week suggest that traders' anticipation of volatility is justified. On Monday, the US dollar rose due to news of the US-China trade agreement, resulting in a one-month implied hedge cost falling to the lowest level since late March. However, in the following days, weak US inflation data and speculation about President Trump's preference for a weaker US dollar caused the dollar to weaken, increasing demand for long-term volatility exposure, especially for longer-dated contracts. These trends suggest that the forex market is pricing in a long-term downtrend for the US dollar. Interbank traders also point out a significant increase in demand for forward curve hedging tools as clients position themselves for market regime switches. This is particularly evident in the one-year implied volatility of the Euro against the US dollarthis indicator has surged from its low point on Tuesday, with this year's rise being the largest on record when measured by z-score (an indicator of the deviation of volatility magnitude from historical averages). Kit Juckes, head of FX strategy at French Industrial Bank, wrote in a report, "It is certain that President Trump wants to rebuild the global trade framework, hence he prefers a depreciation of the US dollar. The current US government seems willing to spare no effort to achieve its goals." Despite reports from Bloomberg that US trade negotiators did not attempt to include currency policy commitments in the agreement, the Bloomberg US Dollar Spot Index still fell by 0.4% on Thursday. Earlier reports suggested that the US and South Korea had discussed currency policies, further fueling speculation about Trump supporting a weaker US dollar.