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Derivatives

Euro/Dollar Vol Drops As Central Banks Cut Rates

One-month euro/dollar implied volatility fell last week as the cash markets remained range-bound with traders waiting for word from central bankers in the U.S. and eurozone. Vol fell to approximately 10%, close to its lows for the year, from 10.3% the previous week. "The cash volatility is just not there, so vols are at low levels and justifiably so," said one trader. He added, "every day that it's at or around USD0.90 it means more certainty and that means less options are bought."

Traders said most market participants sat on the sidelines or took only small punts throughout the week in advance of the Federal Reserve, European Central Bank and Bank of England meetings. The three central banks each cut rates by 50 basis points last week. "We're seeing some very short-term punting up and down in euro/dollar but there has been no strong punt one way or the other," a trader said. However, the dollar did strengthen slightly versus the euro, rising to USD0.896 on Thursday from USD0.912 the previous week.

Ian Stannard, foreign exchange strategist at BNP Paribas in London, said the easing of monetary policy by the three central banks injects further liquidity into the global system, which should benefit the dollar. "This will increase confidence and appetite and is very supportive of the dollar," he added. Furthermore, weak data out of Europe last week led by figures on German orders, coupled with improving U.S. statistics, such as productivity, bode well for the dollar.

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