The dollar rally against the yen last week pushed traders into buying dollar calls and drove down the price and volume of dollar puts. Lawrence Rhee, head of foreign exchange options trading at Société Générale in New York, said the move in dollar/yen caused traders to be less concerned about a fall off in the value of the dollar and this resulted in them turning their attention away from the favored contracts during the dollar weakening of short-dated and one-year dollar puts/yen calls. He added there has also been increased volume in trades designed to take exposure to short-dated dollar calls.
The greenback appreciated Wednesday after U.S. Federal Reserve Chairman Alan Greenspan used his congressional testimony to suggest a raise in interest rates, currently at 2.5%. The Fed will meet again on March 22. Also Wednesday, Japan released data showing gross domestic product shrunk by 0.1% in the fourth quarter, signaling another recession.
Greenspan's speech and the Japanese data led to the dollar strengthening against the yen to around JPY105.5, up from the JPY102 range four weeks prior. One month dollar/yen implied volatility fell to 9.3% from 11.1% a month ago. According to Rhee, there is little reason to believe the greenback's slow but steady gain over the past month will let up. He explained the dollar's health is being bolstered by the Fed's expected interest rate hike coupled with the steady rates in Europe and Japan as well as the U.S.' ability to finance the deficit. "There's no good reason why the dollar won't continue to rally," he said, adding, "Another run-up to new highs for the year is in the not too distant future."