One-month euro/U.S. dollar implied volatility fell 2% last week as traders concluded that the greenback will hold its value because the terrorist attacks in the U.S. will impact Europe as much as the U.S. One-month vol fell to 12% Thursday from 14% the previous week and one-year vol fell to 12.6% from 13.3% Tuesday. Proprietary traders selling one-month and shorter-dated euro calls/dollar puts drove the fall in volatility. Most of the options were at-the-money with spot fluctuating around USD0.9150 throughout the week. The selling of euro calls caused the one-month 25-delta risk reversal to fall to one vol point in favor of euro calls Thursday from two vol points the week before. Traders were selling options because the forecast fall in the dollar against the euro did not materialize and option holders were losing money through time decay. Traders said volumes have not yet returned to the levels that they were at before the terrorist attacks in the U.S.
Kamal Sharma, currency strategist at Commerzbank in London, said the dollar has not depreciated as much against the euro as it has against other currencies, especially the Swiss franc, because the swissie is seen as a safe haven. He added that Switzerland's current account surplus means it can repatriate Swiss franc-denominated assets, boosting its currency. Commerzbank's three-month forecast for euro/dollar is USD0.90. Sharma thinks the euro will fall against the dollar as the introduction of the single currency notes and coins in January gets closer and retailers voice their concerns that they will not have enough small denomination notes and coins to cope with the change over.
