One-month euro/dollar implied volatility rose last week as the euro appreciated against the dollar and reached levels not seen since Sept. 17. Implied vol reached 9.5% last Wednesday from earlier in the day when it was at 8.55%. Leveraged accounts were buying euro calls with strikes at USD0.935 when spot was trading at USD0.92, traders said. The single European currency was trading between USD0.91-0.92 at the beginning of the week.
Mark Austin, chief currency strategist at HSBC in London, said the main driver for the gain in strength of the euro is investor perception that it is relatively stable compared to the dollar and the yen. Austin said Japan has fiscal problems, while investors are shying away from investing in dollar assets. "There is an erosion in the belief that U.S. assets will give you a high return," Austin said. He added that there is a growing feeling in the market that the euro is gaining strength--not just that the dollar is weakening--as the euro also appreciated against other currencies, including the Swiss franc.
Although there was a jump in volatility in the one-month end of the curve, volume was not as high as would be expected with a rise in spot. One trader said he is seeing volatility decline in general as the average duration of trades from hedge funds and corporate hedgers is declining.
