Traders, who had positioned themselves for a further slide in the U.S. dollar at the start of the year, sold implied volatility on the euro/dollar last week after the dollar started to regain strength. This caused one-month euro/dollar implied vol to fall to 9.6% from 10% the week before.
The greenback appreciated to USD1.30 from around USD1.35 at the start of the year. Trading activity was partly driven by the Treasury International Capital System data released Tuesday, which reported a rise in foreign purchases of U.S. securities. But good inflow to the dollar began earlier in the year, said a trader, explaining the dollar has been pushed by Federal Reserve Bank comments suggesting a possible acceleration in interest rate tightening.
The front end of the curve has been heavily played, ranging from the one-week to one-month area. But according to the trader, players will buy back the front end, out to about one-month if the dollar breaks between USD1.29 and USD1.30, which he described as a knock-out level.
The trader added euro/dollar trades could also be impacted by the Jan. 30 Iraqi elections. Investors worried about terrorist attacks could move their money into a safer currency, namely, the Swiss franc. This would impact euro/dollar trading, he explained. In addition, the trader expects more yen movement in the week of Feb. 4-5, when G7 nations meeting in London may pressure China to revalue its currency. A revaluation would strengthen the yen.
