Market players were snapping up euro puts last week despite slight euro appreciation against the U.S. dollar. On Wednesday, the euro rose against the greenback to USD1.2329 from USD1.2263 the week before, while one-month implied volatility dropped to 8.48% from 9.41%.
A popular play among prop desks and hedge funds has been buying euro/dollar one-touch options in which payout depends on the euro sliding to USD1.15 within one month. Also, investors across the board were buying one-week euro puts with strikes at USD1.20, one official said, explaining these players think the euro will slip against the dollar, in line with the longer-term greenback strengthening. "It seems like a good trend has been established with the risk reversals steadily bid for euro puts," one trader said, noting over the past month players have generally favored euro puts.
The dollar bullishness is fueled by the momentum of the greenback's rise against the euro since April when the exchange rate stood at USD1.30, said David Solin, an economist with Foreign Exchange Analytics in Essex, Conn. "In the blink of an eye it was down to the USD1.22 range," he said, explaining this big shift continues to drive interest in far out-of-the-money euro puts. On June 15, U.S. inflation data will be released, he noted, adding its results could move the euro/dollar out of last week's USD1.22 range.
Early last week, the dollar was driven lower against the euro by disappointing U.S. payroll figures and comments made Tuesday by Federal Reserve Board Chairman Alan Greenspan suggesting a pause in interest rate hikes, currently at 3%, the trader said.
