Implied volatility in the short-end of the euro/dollar curve continued to rise last week as a bearish view on the U.S. dollar dominated foreign exchange plays. One-week volatility last Wednesday rose to 11.5%, up from around 11% the week before, according to a trader in New York. Euro/dollar spot was trading at USD1.24, down from USD1.26 where it had traded seven days previous, he added.
Most of the trading was concentrated in the short end of the curve, driven by the Group of Seven meeting scheduled for this week, said the trader. Not a lot of directional bias prevailed, although a continued bearish outlook for the greenback indicated a slight trend toward buying dollar puts/euro calls going into the G7 meeting, he noted. Proprietary trading desks were particularly active over the past week, although no direction was obvious from these accounts, he added. Traders expect the dollar to continue its decline against the euro.
Michael Rosenberg, global head of foreign exchange research at Deutsche Bank in New York, agreed with the bearish stance on the greenback, expecting the dollar to hit USD1.30-1.35 in the next three to six months before climbing to USD1.40-1.50 over the next two years. The large current account deficit in the U.S. is the main driver behind movements in the currency pair and although Europe may want to stop the dollar's decline there is little it will be able to do, he noted.
