Buoyant Fed Report Drives Dollar Calls

Investors across the board bought up shorter-dated U.S. dollar calls last week as the greenback gained against the euro, buoyed by a positive report from Federal Reserve chairmanAlan Greenspan. The dollar moved more than a cent higher against the single currency on Wednesday to USD1.2043, prompting a plunge into three-month U.S. dollar calls and euro puts, traders reported. "People are really interested in the dollar bullish story," said a trader. The cross stood at USD1.215 Thursday, and one-month implied volatility dropped to 8.83% from 9.1% the previous week.

Dealers were selling dollar calls with strikes between USD1.18-1.20, said one trader who also noted the options were being used as a stop-loss strategy by investors, who were buying as a safe bet on the strength of the currency. "I don't think they are making much money on the trades," he noted.

Marvin Barth, currency strategist at Citigroup in London, said an increase in volatility in the spot market had also pushed more dollar players to the options market, where implied volatility is trending lower. Greenspan painted a healthy picture of the U.S. economy in his monetary policy report to Congress last week. "A Greenspan event is always dollar positive," said Adrian Hughes, currency strategist at HSBC in London. Barth also said the absence of any drastic bearish news in the report had contributed to both a strengthening greenback and the appetite for dollar calls. "The information certainly did not change any sentiment toward the dollar," he said.