Tail risks explain 43 percent of dollar moves against the euro
Repricing of tail risks accounted for 43 percent of daily dollar fluctuations against the euro following the April 2025 US tariff announcement. A Banca d'Italia study finds the currency behaved like a risky asset until early 2026 energy turmoil restored safe-haven demand.
Downside risks eclipse rate differentials
Following the US tariff announcement on April 2, 2025, the US dollar depreciated by roughly 11 percent against the euro and 8 percent in broad effective terms.
Daily regression analysis by Marco Massa and Gabriele Zinna reveals that the three-month risk reversal explained approximately 43 percent of daily USD/EUR variation between 2025 and 2026, up from 18 percent over the 2015–2026 period.
Concurrently, short-term interest rate differentials lost explanatory power, falling from a regression coefficient of 2.583 to 2.158. Option-implied downside variance exceeded upside variance, while the correlation between dollar movements and US equity returns turned positive, showing that the currency shed its hedging traits.
Oil uncertainty revives safe-haven flows
The outbreak of conflict in the Middle East on February 28, 2026, reversed the post-tariff asymmetry.
Driven by crude oil volatility, the three-month risk reversal returned to positive territory as upside variance rose above downside variance.
Explanatory power of oil uncertainty reached 23.1 percent, reflecting the position of the United States as a net energy exporter versus the euro area as a net importer.
Concurrently, the correlation between dollar returns and US equities turned negative again, restoring safe-haven dynamics.
Safety by circumstance, not structure
The analysis exposes how quickly protectionist tariffs can strip the dollar of its traditional safe-haven status.
Energy volatility provided a temporary reprieve, yet relying on commodity dislocations cannot replace institutional stability.
Investors treating the dollar as an unconditional hedge are managing risk on borrowed time.