The greenback regained its ground against the Japanese yen to pre-Chinese revaluation levels last week, but investors held back from buying up dollar calls. Traders said in spite of the dollar's gains, most players were not interested in taking long dollar positions because of long-term concerns Asian banks are moving away from holding the greenback in foreign reserves. In the spot market, the dollar appreciated against the yen to JPY112.5 from JPY110 the week before, and one-month implied volatility on the currency pair rose to 8% Wednesday from 7.7%.
Some financial institutions, however, were buying out-of-the-money options striking at JPY120, believing expected U.S. interest rate hikes will determine how the crosses move. "It's quickly becoming all about yields," said Rob Kelly, a senior foreign exchange options trader at SG Corporate & Investment Banking in New York.
"By releasing the yuan from the dollar peg to a basket of currencies, China is giving the dollar a less important role," said Kelly, adding this led to questions over whether other Asian banks would keep buying the greenback.
The People's Bank of China revalued the yuan against the dollar to RMB8.11, a 2.1% move higher, on July 21, causing the dollar to plunge against the yen to JPY110 from JPY112.5. The dollar fell against the yen as the Japanese currency appreciated alongside the Chinese yuan.
