Volatility Rises As Dollar Continues Slide Against Euro

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Volatility Rises As Dollar Continues Slide Against Euro

The cost of one-month U.S. dollar/euro options rose last week as the dollar sank to USD0.945 Wednesday, its lowest level against the common currency in 17 months. Implied volatility rose to 9.9% late Wednesday from 9.5% at the start of the week, according to options traders in New York. A weaker dollar tends to lead to higher volatility. They said continued declines in the U.S. equity markets are causing weakness in the dollar. "There's a lack of capital inflow as a result and given the fact that the dollar is a deficit currency, you need money coming in for the dollar's value to remain high," noted one trader. He and others reported strong buying interest in one- and three-month euro calls/dollar puts with strikes ranging from USD0.95 to parity. The euro's run pushed 25-delta risk reversals further in favor of euro calls at 0.9 vol, up from 0.8 vol at the beginning of the week.

Robert Lynch, an fx strategist at BNP Paribas in New York, said investor expectations from the U.S. equity markets are being trimmed and with them, the strength of the dollar. "If the perceived risk-adjusted return is going to be a lot less here, then that's going to have an effect on global investor demand for dollars," he said. Lynch added the dollar has exceeded expectations in recent years by remaining strong despite the weakness in the U.S. economy and the greenback's recent slide is also a function of unwinding those gains. He expects the euro will continue to rally and Paribas' house view calls for spot to be at USD0.98 at the end of the third quarter.

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