The increase in last Wednesday's Consumer Price Index data sparked a jump in demand for short-dated U.S. dollar puts and euro calls. Players were buying mostly one-week puts with strikes fixed at around USD1.32. The price of protection on the dollar downside climbed over the week, as one-month implied volatility increased to 8.7% last Thursday, up from 8.2% at the start of the week. In the spot market, the euro strengthened slightly to USD1.30 from USD1.29.
The CPI data reported a 0.6% rise in inflation from last month. Jeff Gladstein, head of foreign exchange trading with AIG Financial Products in Wilton, Conn., viewed the data as negative. He called it a bout of upward momentum in an otherwise stagnating U.S. economy, adding, "A stagnating economy with a bit of inflation is the worst kind."
There was some hope on the horizon for the ailing greenback. Tom Kushner, head of AIG's foreign exchange sales team in Wilton, Conn., said he expects the Treasury to announce it will close a tax loophole that deters U.S. companies from bringing money held overseas back into the U.S. Researchers estimate this could bring back some USD200-300 billion into the U.S., giving the greenback a longer-term uplift.
