The cost of U.S. dollar/euro options fell last week in line with a stronger dollar and gains in the U.S. equity markets amid quiet end-of-summer trading. One-week euro/dollar implied volatility fell to 9.75% Thursday in New York from 11.25% Monday, according to traders. "The dollar has recovered somewhat on stronger stock prices, so vols are lower," summed up one trader. He said higher U.S. equities last week seemed to be offsetting a longer-term trend that bodes well for the euro. The Federal Reserve's shift toward a tightening bias earlier this month and the increasing realization that short-term interest rates, and thus yields, will be higher in Europe is positive for the euro. With that in mind, a common trade last week was for investors to buy long-dated euro calls with strikes at parity and above. But short-term that move higher is unlikely to happen. "People are willing to bet that trend is not going to come into play in the next week, otherwise they wouldn't be selling volatility," a trader said. Spot was USD0.97 Thursday, down from USD0.981 Wednesday.
Bob Gay, head of fixed-income research at Commerzbank Securities in New York, said that last week's stronger dollar was probably more of a short-term phenomenon and the euro looks set to continue its ascent. "The euro went awfully far in a very short amount of time and we're just paring some of those gains." He is predicting the euro will shoot past parity and rise to USD1.05 by year end. "As the risk aversion piece of the puzzle ebbs and flows, we'll go to tops and bottoms, but long term the slope [for the euro] is still higher," he said.
EUR/USD Spot & One-Month Implied Volatility
