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Vols Rise As Greenback Falters

The cost of euro/dollar options jumped by around 25 basis points last Wednesday on the week before as the dollar came under renewed pressure in the spot market. Last Wednesday one-month implied volatility stood at 9.25%, having reached 9.5% earlier in the week, while one-year volatility rested at 10.25% having hit 10.5% in the same period, noted a trader in New York. The currency pair traded at USD1.007 last Wednesday in the spot market, having reached USD1.01 last Monday.

A large part of the activity has come from speculative interest, with bank's proprietary desks trying to make money after a quiet period, noted the trader. Buying euro calls/dollar puts were the most popular trades, he added. A low interest rate environment in the U.S. and slow global growth will continue to weigh on the dollar for the next week or so. Having a short dollar position will be the best bet going forward, the trader predicted.

Robert Gay, global head of fixed income research at Commerzbank in New York, predicts the euro will continue strengthening over the next six months, slowly climbing to reach USD1.05 before beginning its descent. The ascent may falter on Dec. 5, when industry observers are predicting the European Central Bank will cut interest rates. The market may then realize that the ECB will always be less aggressive than its U.S. counterpart, he noted. Gay anticipates the euro will settle on parity with the dollar in the long term.

EUR/USD Spot & One-Month Implied Volatility

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