One month euro/U.S. dollar implied volatility jumped more than 1% last week, reaching a high of 10.6% early in the week before settling at 10.3% last Thursday, said a New York-based trader. Euro/dollar vol had traded as low as 9.7% the previous Thursday before grinding higher on the back of the euro eking out and then giving back a USD0.02 gain in the spot market, to reach USD1.07 last Thursday.
Most euro/dollar trades have been in the short end of the curve, with no directional activity dominating, said the trader. In spite of the recent vol spike there is still room for the numbers to go higher, with vol on the currency pair traditionally sitting around 11.5%, he noted. If the dollar strengthens against the euro, however, vol may in turn decline.
Larry Brickman, foreign exchange strategist at Bank of America in New York, said the euro's spot market gains against the dollar have resulted in profit taking. The euro run has been a bit too much, too fast and will likely now take a breather. Recent public statements on the U.S. stance regarding Iraq, such as President George W. Bush' State of the Union speech last week, have pushed vol higher, he said. The more hawkish the U.S. is on war with Iraq, the more likely the dollar will weaken, with spot likely to reach USD1.10 over the next month, and gradually decline to USD1.15 by year end, he predicted.
