One-month Japanese yen/U.S. dollar implied volatility rose to 11.5% Wednesday from about 9% a week earlier as demand for yen calls/dollar puts increased and fears over a weakening dollar continued to grow. Hedge funds and investment banks were most active buying one-week yen calls/dollar puts last week as the one-month risk reversal moved further in favor of yen calls. The options typically had strikes around JPY122.50 when spot was trading at around JPY121.75.
Many traders feared the U.S. will abandon its strong dollar policy. However the fears were abated last Wednesday when U.S. policy makers publicly stated they had not changed their position on keeping the dollar strong. Traders attributed the spark in yen calls in part to theNikkei reaching a 15-year low and increasing concern that Japanese financial institutions with large equity investments could suffer a severe drop in valuations.
Paul Podolsky, a strategist at FleetBoston Financial, predicted more volatility in the dollar for the rest of the month as investors wait for an anticipated 25 basis point rate cut by the Federal Reserve and a possible 50bps cut by the European Central Bank. Podolsky remains bullish on the dollar over the next three months. "There isn't any evidence that U.S. policy isn't working," he said, adding that looser monetary controls by the U.S. would help to further strengthen the dollar.
