Francois Villeroy de Galhau, head of the Bank of France, commented on US President Trump’s tariff pause, referring to it as a less negative development, but noted ongoing concerns for the American economy due to protectionism. He mentioned potential discussions over the next three months regarding the tariffs while recognising Europe’s measured response in negotiations.
Villeroy indicated that recent Trump policies have undermined confidence in the US dollar but expressed optimism by stating no expectation of a recession in France. At the time of reporting, the EUR/USD was up by 0.30% at 1.0980.
A Brief Respite
When Villeroy describes the pause in tariffs as “less negative”, it’s a faint nod to the idea that things haven’t necessarily improved – they’ve just stopped getting worse, for now. The immediate pressure from one direction has temporarily eased. But the longer picture, especially for those of us assessing cross-border economic flow, doesn’t permit much comfort. The three-month window he brings up is particularly telling. It hints at a provisional truce, not a shift in policy. Traders must not be lulled into thinking that uncertainty has evaporated. On the contrary, it’s just been momentarily shelved.
His remark about protectionism hurting the US economy isn’t just academic. Retaliatory measures, strained supply chains, and fractured confidence in transatlantic trade form a cocktail that disturbs pricing models and correlation assumptions. As volatility layers onto volatility, ranges that once held firm start to dissolve faster than anticipated. We would do well to monitor not just headlines about negotiations, but the subtler reactions in credit spreads and forward curves.
Assessing Economic Stability
Villeroy’s concern over the dollar stems from more than just noise. Whenever the top central banks detect erosion in global faith in a reserve currency, it sets off a chain reaction in risk assessments that we cannot ignore. Portfolio realignments that pivot away from USD parities trickle into how margin requirements, hedging strategies, and contract expirations are handled. The subtle shift in tone around the dollar’s stature does not appear priced into most derivative instruments at the moment. There’s an imbalance forming, driven partly by policy posture and partly by sentiment decay—one that’s creeping closer into forward pricing assumptions.
That EUR/USD bump—up by 0.30%, landing at 1.0980—was not just a technical move. Even as inflation remains somewhat anchored in the euro bloc, the momentum speaks volumes about perception. The market senses stress in dollar-denominated positions. As implied vol levels widen, particularly at the longer ends of the options curve, the call premium on EUR strength suggests hedging behaviour rather than directional conviction. We should adjust for that distinction. If positioning is too exposed to downside deltas without layered hedges or if forward swaps skew opposite to anticipated interest differential, recalibration is overdue.
It’s also important to consider how the eurozone, in Villeroy’s words, is handling negotiations with a measured stance. The term “measured” gives away a lot—it’s a strategy based on delay and containment. Policy restraint in one zone, contrasted with spasmodic stimuli or threats in another, changes the backdrop for valuation. Derivative traders may need to revisit short-term pricing models that assume parity in negotiation outcomes. There’s policy asymmetry building, and it will ripple through strike structuring and barrier placements.
Lastly, when Villeroy says there’s no recession expected in France, it helps us confirm that the ECB doesn’t currently view local shocks as likely to disturb broader euro stability—at least not imminently. However, the contrast with worry over US direction should not be missed. Stability in one region does not automatically offset instability elsewhere. For traders embedded deeply in cross-rate correlation models, longer-term volatility suppression strategies built in quieter months may no longer be reliable if US risk stays elevated. We recommend mapping correlation decay across sectors and isolating positions that overly rely on historical volatility dampening.
In the meantime, positioning bias must lean towards caution. Let’s avoid mistaking a pause for calm. Structural noise is creeping upward, and pricing curves are already reflecting it in the soft tails. Keep exposure nimble. Move wide. hedge accordingly.
