April 3 (Reuters) - Implied volatility is a proxy for FX realised volatility - a key parameter of an FX option premium, while risk reversals charge an additional implied volatility premium for strikes in what is perceived to be the most vulnerable direction.

EUR/USD risk reversals have seen their newly acquired EUR call over put (topside over downside) strike premium reach new highs since March 2020 amid very strong demand.

The initial EUR/USD rally to new long-term highs at 1.0955 in early-mid March was the catalyst for the benchmark 1-month 25 delta risk reversals to flip from a long-standing EUR put over call (downside over topside) strike premium to EUR calls over puts (topside over downside). Since Wednesday's tariff announcement it's extended that premium to 0.75 - the highest topside strike premium since the start of the pandemic in March 2020. Before that, the 2016 U.S. election was the previous time it had reached such highs.

Other expiry dates have followed suit, with 3-month expiry 25 delta risk reversals trading 0.55 EUR calls over puts and 1-year having now almost completely erased the downside strike premium that has been in place since early 2021.

Before Wednesday's tariff announcement, traders were buying USD puts outright versus EUR, GBP and JPY, which has helped to inflate the topside strike risk premiums amid the subsequent USD losses against those currencies.
EUR/USD 25 delta risk reversals

(Richard Pace is a Reuters market analyst. The views expressed are his own)