Traders were buying short-dated euro puts/U.S. dollar calls last week in anticipation of strong U.S. employment figures being released Friday, after DW went to press. The spot rate hovered around USD1.30 and one-month implied volatility stayed between 8-9%.
"We have been expecting the dollar to gain a more sustained improvement," said Robert Sinche, head of foreign exchange strategy with Banc of America Securities in New York. He predicts the dollar will strengthen to about USD1.25 this year from its current position of USD1.30. In recent weeks, the currency market has focused on long-term structural issues such as the twin deficit, he said, referring to the U.S. budget and trade deficit commonly blamed for the dollar weakness. "We think the market will shift back to focus on cyclical forces and there the dollar has a distinct advantage, particularly versus the euro," he said.
Two major developments last week supported Sinche's claims. First, the International Monetary Fund is reducing its growth estimates for the euro zone to 1.6% from 2.3% and the European Central Bank is rumored to be modifying its estimate as well, to 1.6% from 1.9%, according to Sinche. Second, a survey conducted by the Business Roundtable, a Washington, D.C.-based association of chief executives from leading corporations, found ceo capital spending outlooks are high. "We've gotten a clear sign that economic performance is clearly shifting further in favor of the U.S.," he added.
Furthermore, the wide-spread expectation the U.S. Federal Reserve will continue to raise interest rates and the expectation the ECB will hold rates, especially after its recent release of poor economic and low inflation numbers, will work to the advantage of the U.S. "The environment is dollar positive," he said.
