The role of tail-risk repricing in the USD/EUR exchange rate

Marco Massa () and Gabriele Zinna ()
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Marco Massa: Bank of Italy
Gabriele Zinna: Bank of Italy

No 1064, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We assess the behaviour of the US dollar over the 2015-2026 period, with a particular focus on the developments since 2025, by examining the dollar exchange rate against the euro. The analysis is conducted at a daily frequency using a parsimonious model and information from currency options. We find that the dollar depreciation following the US tariffs announcement on 2 April 2025 was mainly associated with a repricing of currency tail risks, while interest rate differentials played a smaller role. Unlike previous episodes of market stress, the dollar behaved more like a risky asset, losing some of its traditional safe-haven and hedging properties. Following the outbreak of the Middle East conflict, the dollar appreciated and tail risks became more balanced. Overall, our findings point to an ongoing reassessment of the dollar's risk profile.

Keywords: USD/EUR exchange rate; tail risk; currency options; oil-price volatility (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2026-10
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