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Dollar/Yen Risk Reversals Flip To Yen Puts

One-month 25-delta U.S. dollar/Japanese yen risk reversals flipped to favor dollar calls/yen puts last week after traders bought dollar calls as their confidence increased that global equity markets would settle at levels higher than pre-Sept. 11. "It's a sentiment trade, a story the market wanted to believe," said a trader in London. Risk reversals flipped to 0.3 vol in favor of dollar calls/yen puts Thursday from 0.3 vol in favor of dollar puts at the beginning of the week. Risk reversals had been as high as 2.2 vol for yen calls in late September.

Traders reported sizable interest across the board, especially for six-month options with out-of-the money strikes as high as between JPY130-140. Strikes of JPY124-125 were also common, with hedge funds, prop desks and banks among the buyers. Spot was at JPY122.75 Thursday. "We're seeing a plethora of strikes across the curve. Typically on a move higher everyone starts to think you're heading to the moon," noted another trader.

Michael Lewis, a senior currency economist at Deutsche Bank in London, said rate cuts have pumped liquidity into the U.S. economy and risk aversion has dropped, leading to more confidence in the dollar. Yet he said the commodity and bond markets, which continue to touch lows, indicate dollar bullishness may be short-lived. "Our feeling is it will be the equity market and the dollar that will need to adjust lower," he said. Deutsche Bank's year-end dollar/yen forecast is JPY125.

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