One-month euro/dollar implied volatility jumped to 13.2%/13.5% on Thursday from 12.05%/12.75% on Wednesday. The rise in implied vol followed a drop in the euro in the spot market versus the greenback to below USD0.92. Vol rose as euro/dollar spot fell because demand for euro puts/dollar calls escalated as traders hedged their positions. London-based traders said with the euro falling below USD0.92, the one-month risk reversal is favoring euro puts, whereas it previously favored euro calls. The most demand was for one-week euro puts struck at USD0.90, and even some that went down as low as USD0.80. The options had notional sizes of USD30-50 million. The euro fell against the dollar from USD0.9296 on Monday to USD0.9028 on Thursday.
Steven Saywell, currency strategist at Citibank in London, said the euro has been falling against the dollar because the foreign exchange market is confident that Alan Greenspan, chairman of the Federal Reserve, will bring about a quick recovery in the U.S. economy. Greenspan's recent comments about avoiding a recession have increased players' confidence.
