Investors pulled the plug on long U.S. dollar positions late last week in response to a sharp depreciation of the greenback against the euro, triggered by a combination of Hurricane Katrina and bearish economic data. "[The] dollar was on an upward trend at the start of the week and people were certainly late onto the move downward," said one trader at a U.K. house.
Most players chose to trade the euro/dollar cross, buying euro call options with strikes between USD1.26 and USD1.28, from overnight out to one-year. One-month spot was trading at USD1.255 while implied volatility for the same period rose to 8.74% on Thursday, from 8.22% on Monday. "The market is nervous about the economic situation in the U.S," said one trader, adding, "This has been overlaid with high oil prices and overlaid again with the hurricane."
In a FX report released by BNP Paribas in London, strategists attributed the dollar decline to a number of factors; negative data from the Chicago purchasing management index (which showed a sharp fall in U.S. business activity), a spike in the oil price to USD70 a barrel and increased speculation the Federal Reserve will halt interest rates. "With portfolio flows already moving in favor of the euro, the euro/dollar bottom for 2005 may now be in place and this suggests a resumption of the long term uptrend," the report said.
Another strategist at a U.K. house predicted greenback bearishness will not be sustained. "In the short term there will be a lot of disruption to the economy as a whole, but over the long term it should be a minor blip," he said.
