The price of euro/dollar options fell by around 1% last week as trading activity slowed in the run up to the U.S. Thanksgiving holiday. Last Tuesday one-month implied volatility was 7.4%, having stood at 8.4% the previous week and been as high as 9.6% in the weeks leading up to the holiday, noted a New York-based trader. The euro tripped under parity, trading at USD0.99 last Tuesday, down from USD1.0025 where it had sat the previous week. Trading activity has been lackluster, with most traders willing to wait until after Thanksgiving to take on new positions, said the trader. There was little speculative or corporate interest in any dollar pairs, which is what generally drives upward movement in volatility, he added.
Robert Lynch, currency strategist at BNP Paribas in New York, said the dollar rose in the spot market on dissipation of concerns on the currency. Pessimism arose following the interest rate cuts made by the Federal Reserve, with many worrying that the size of the cut pointed to serious economic problems. These concerns have now largely faded, with the market believing that the cuts were made to address a rough patch in the U.S. economy and nothing more serious, he explained.
Expectation that the European Central Bank will cut interest rates this week is working against the euro, which is likely to fall as low as USD0.98 in the coming weeks, predicted Lynch. Medium term dollar weakness, however, will reverse this move with the dollar expected to fall to USD1.05 against the European currency by the end of the second quarter.
EUR/USD Spot & One-Month Implied Volatility
