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Euro/Dollar Vol Rises As Trend Continues

The cost of dollar/euro options edged slightly higher last week as the common currency continued its assault on the greenback in the spot market. One-month implied volatility rose to 12.1% by Wednesday in New York, up from 11.5% at the start of the week as the dollar gave up gains it notched up during the preceding holiday-shortened week. Traders said although the euro still appears headed higher, the options market has been somewhat choppy as punters take profits once spot hits USD0.98, only to enter new long euro options once spot falls to USD0.97. Spot was trading at USD0.989 Wednesday.

"People have been buying one-month and three-month options with high strikes, USD1.00 and USD1.05, respectively," said an options trader in New York. He added: "But we're not seeing huge hedge fund ticket items like we have in the past. That's all been done in the cash market because they all feel pretty comfortable with the [certainty] of the euro's move." 25 delta risk reversals remained stable for the week, at 1.1 vol in favor of euro calls.

Despite the absence of any major fx news, the trend for a stronger euro continues to play itself out, said Jason Bonanco, currency strategist at Credit Suisse First Boston in New York. The U.S. current account deficit, compared to Europe's surplus, is the main driver. "And one thing that's reasonably clear is the proliferation of corporate scandals exacerbates the problem. You don't need new news, all you need is for the situation to not get better," he noted, explaining the dollar's continued weakness. And although the euro has not yet reached parity despite coming close in recent weeks, Bonanca said in the big picture, the common currency has gained a lot of late. "It's come 10 cents in 10 weeks, that's a long way in fx," he continued. CSFB's house view is for the euro to rise to USD1.05 in the next three months before dropping back to parity over the next 12 months.

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