U.S. dollar calls and euro puts were being snapped up after positive U.S. economic data sent the greenback more than a cent higher against the euro Wednesday to USD1.208. But, in spite of these gains, the dollar did not take back all the ground it had lost against the euro since the previous week, when the cross traded around USD1.190. One-month implied volatility dropped slightly to 9.1% from 9.5% last week.
A trader said one-month dollar call options were typically striking at USD1.188, and a fair number of short-dated one-touch, knock-out options were in the market with a strike price of USD1.16. The dollar rebound was led by news last Wednesday the trade deficit narrowed in May. "If anything, the Street expected a bigger deficit," said one trader in New York. "The fact that it was slightly narrower than expected made the dollar bid across the board."
A BNP Paribas report noted early last week the euro made significant gains against the greenback after the currency pair reached a low of USD1.187 the week before. But unless U.S. rate expectations turn around, the greenback is likely to develop another leg of strength in August and September, the report said, noting with trade deficit data out of the way, the market's focus will turn back to interest rate differentials.