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Derivatives

Vol Rises As Euro Gains On Greenback

The cost of U.S. dollar/euro options rose slightly last week in line with a one-cent move higher in the value of Europe's single currency. Implied volatility for one-month dollar/euro options rose to 10.5%, up from 10.2% to start the week, in what traders described as a holiday-type market with a short week in the U.K. and Labor Day approaching in the U.S. In the current cycle, vol and the euro have moved inversely. The euro appreciated to USD0.98 late Wednesday from USD0.97 Monday. "We've had some weakness in the dollar so that's put a floor on volatility, but no one really wants to buy or sell right now," said one options trader, adding, "it's a stalemate."

A common trade was for investors to buy long-dated euro calls/dollar puts with strikes at parity or higher. The herd continues to favor a stronger euro, with 25-delta risk reversals bid slightly higher by Wednesday at 0.9 vol in favor of euro calls.

Robert Lynch, foreign exchange strategist at BNP Paribas in New York, said euro/dollar was rangebound during August at USD0.96-0.99 is more of a short-term breather than an indication that the euro's run is up. He said several factors, such as the viability of the U.S. economic recovery and a potential strike on Iraq add up to expectations of continued euro gains. "The factors still imply that the euro will go higher," he said. The French bank's house view calls for the euro to reach USD1.02 by the end of September.

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