Euro/dollar risk reversals moved in favor of euro calls/dollar puts as the dollar began to strengthen against the euro last Thursday due to better-than-expected numbers from the Institute for Supply Management in the U.S. The 25-delta risk reversal moved to 1.1% from 1.4% in favor of euro calls earlier in the week. And at the same time, implied volatility in the currency pair fell to 10% from 10.3%, because traders predicted the dollar's fall was coming to an end. "Now the directional bias has evened out," he added. The greenback appreciated against the euro to USD1.0371 on Thursday from USD1.05 before the New Year holiday.
The market was so illiquid in the holiday week that traders said very few euro/dollar trades were executed. Bob Gay, head of fixed-income research at Commerzbank Securities in New York, said although the dollar strengthened last week against the euro, it is still overvalued and he is predicting a depreciation this year. He explained the U.S.'s large current account deficit means the currency should have already depreciated, but throughout the 1990s the dollar experienced an overvaluation similar to the stock market.
Euro/Dollar Spot & 25-Delta Risk Reversal
