One-month euro/U.S. dollar implied vol surged upward last week to around 14% from a low the previous week of 12.75% as the euro showed signs of losing footing against the dollar in the spot market. The euro drifted downward from its high early this month of around USD0.95, hitting USD0.9220 toward the end of the day Wednesday.
As the euro rose against the greenback last year, and leveled out in the middle of this month, players put on collars, buying euro calls struck around USD0.98 and selling euro puts struck around USD0.90. "We were getting ready to put on our parity party hats," explained one trader in New York.
As the euro fell again last week, players bought options to cover their short euro put positions, according to the trader. When the euro weakened past USD0.94, vol rose into the 14% range, said Mark Henrici, v.p. foreign exchange options at Bank of America in Chicago.
The dollar weakened toward the end of last year and beginning of this year against the euro as the U.S. seemed to be on the cusp of an economic downturn, U.S. stock markets sagged and the Federal Reserve cut interest rates by 50 basis points, said Bob Sinche, head of currency strategy at Citibank in New York. As the U.S. equity markets have rallied in the last several weeks, and many speculative players have become long euros, the euro has started to sink on fears the currency has been overbought.
