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

Author

Listed:
  • Marco Massa

    (Bank of Italy)

  • Gabriele Zinna

    (Bank of Italy)

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.

Suggested Citation

  • Marco Massa & Gabriele Zinna, 2026. "The role of tail-risk repricing in the USD/EUR exchange rate," Questioni di Economia e Finanza (Occasional Papers) 1064, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_1064_26
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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