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Derivatives

Euro/Dollar Vol Spikes As U.S. Gains Ground In Spot

One-month implied volatility on the euro/dollar pair shot up to 10.75% last Wednesday from 10% at the end of the preceding week. The climb came on the back of a sharp dollar gain against the euro in the spot market. The dollar traded at USD1.08 last Wednesday, compared with USD1.097 the previous Friday and USD1.088 the Wednesday before, according to a New York-based trader.

Most of the volatility jump in the currency pair was driven by the sell off in the euro, which in turn was precipitated by a stronger U.S. economy, said the trader. Market players with long-term bullish euro strategies also came into the market needing to hedge their positions, he said. Stronger economic data as well as better performing equity markets all contributed to the dollar rally, he added.

Lauren Germain, foreign exchange strategist at Bank of America in New York, agreed that bullish U.S. stock markets over the previous week served to support the dollar against the euro. The perception that the euro gained too much ground against the dollar too fast also influenced the currency move, she added. Growth expectations for the U.S. will continue to see the dollar strengthen moving into the end of the year, when it will likely trade around USD1.08. The gap between the dollar and euro will likely continue to close through next year, Germain predicted.

EUR/USD Spot & One-Month Implied Volatility

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