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Derivatives

Vol Falls As Dollar Gains Against The Euro

The cost of euro/dollar options headed lower last week, as the dollar appreciated against the common currency in the face of volatile global equity markets. One-month implied volatility fell to 11.5% late Wednesday in New York from 12.7% a week earlier. However, traders said a stronger dollar was probably only a function of fx traders locking in profits to offset losses elsewhere in their portfolios last week, and that the euro is likely to continue to appreciate. "The dollar was oversold, the euro was overbought and people are locking in some gains," said one trader, adding, "it's not people reversing positions, more just squaring out." As proof, he said a common trade remained was to buy short-dated euro calls/dollar puts with strikes at USD1.02 and higher. Euro/dollar spot was at USD1.02 early last week before coming back under parity to USD0.99 by late Wednesday in New York.

Strategists said the dollar's improvement last week seems to be largely corrective and not a shift in momentum. "There was a need for some funds to close out profits to offset losses elsewhere on their books," said Robert Lynch, fx strategist at BNP Paribas in New York, explaining last week's move downward in spot. But he added the main factors that have led to a weaker dollar, namely a gap between U.S. and European rates, a delay in plans to tighten U.S. rates and a weak U.S. equity market, are all still in play. "This is not going to be an ongoing event and will not put pressure on euro/dollar," he said, referring to investors' taking profits last week. BNP predicts euro/dollar will be USD1.02 by the end of the quarter.

EUR/USD Spot & One-Month Implied Volatility

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