The price of euro/dollar options edged higher last week as the euro's spot market rally eased, with one-month implied volatility standing at 10.25% last Wednesday, up from 10.1% the previous week, said a New York-based trader. The currency pair traded at USD1.07 Wednesday, down from USD1.09 the previous week.
Uncertainty over how the situation in Iraq will play out meant traders were not prepared to make large bets, with most trading being executed for tactical rather than strategic reasons, explained a trader. Real money investors have been buying options to hedge their cash positions. In spite of the slight nudge in volatility, the price of euro/dollar options remains relatively low in view of the uncertain market conditions and vol is likely to go steeper over the coming weeks, added the trader.
Michael Rosenberg, global head of foreign exchange research at Deutsche Bank in New York, said the shift in euro/dollar spot can be explained by traders' realization that the dollar had been oversold, with trading on the currency pair having moved too hard too fast. Recent weakening of the euro against the dollar is part of a corrective move with the issue now being how low the euro will fall before starting to strengthen. Rosenberg is bearish on the dollar over the long run, expecting the pair to trade between USD1.15 and USD1.20 by year-end.
EUR/USD Spot & One-Month Implied Volatility
