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Euro/Dollar Vol Jumps As Spot Falls

03 Jun 2001

One month euro/dollar implied volatility shot up to 12% Friday from 10.9% Monday after the euro depreciated against the greenback to USD0.8456 from USD0.8587. There was demand for euro calls/dollar puts from traders who feared European Central Bank intervention and traders took profit on euro puts/dollar calls they had bought when the euro was trading in the USD0.90-0.94 range. One trader said euro calls/dollar puts with maturities out to two weeks traded last week with strikes between USD0.8650-USD0.88.

Michael Lewis, senior currency strategist at Deutsche Bank in London, said one of the main reasons the euro has depreciated against the dollar over the last week is because central bankers have removed most of the fears about intervention to prop up the euro. He added the conversion of Morgan Stanley Capital International's equity index to free float started last week and is set to reduce investments in euroland stocks by approximately USD40 billion over the next year. Active fund managers started moving this capital out of the euro-zone last week, resulting in a weaker euro.

Consensus forecasts predict the euro will recover against the greenback in the coming months, according to Lewis, who expects oil prices will fall to USD20-USD22 giving the negatively correlated euro a boost. Data showing falling productivity in the U.S., which could lead to a sell off of in U.S. equity markets would also lead to a recovery of the single currency, according to Lewis.

03 Jun 2001