The cost of U.S. dollar/euro options rose last week, as the common currency gained against the greenback amid weaker U.S. equity markets. One-month implied volatility for euro/dollar options rose to 11.2% Thursday in New York, compared to 10.5% Monday, according to traders. Vol and the dollar move inversely in the current cycle. "The level of implied vol is rising and the skew for risk reversals is even more in favor of euro calls. The correlation is picking up between the dollar and U.S. equity markets," said one options trader. Spot was approaching parity at USD0.9950 Thursday morning, up from USD0.98 Monday. Common trades were for investors to buy euro calls above parity across all tenors.
Despite the one-year anniversary of Sept. 11 looming, the price of short-term options remained at a normal level and did not reflect any undue anxiety. "The market is pricing in the expectation that it will be quiet and illiquid."
Eric Nickerson, a currency strategist at Bank of America in New York, said the options market activity is in line with the broader consensus that the euro will move higher in the coming months. In addition to weak U.S. equity markets and low U.S. rates expectations of a potential U.S. attack on Iraq are pushing the dollar down against the euro. "Foreigners are not finding U.S. assets attractive right now--the equity market is inclined to go lower...Plus, the financial burden of [an attack] provides more reasons for not being in dollars," Nickerson said. BofA's house view calls for the euro to hit USD1.03 by year end.
EUR/USD Spot & One-Month Implied Volatility