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Dollar's New Years Comeback Attracts Option Buyers

The U.S. dollar gained in the spot market last week driving players to snap up options on dollar crosses to capture short-term volatility.

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January 2007

II Pensions Weekly

Positive manufacturing and employment data releases Wednesday were responsible for the spot move and with non-farm payrolls due Friday, fx investors were looking to pickup gains from further volatility, traders reported.

One-week implied volatility on EUR/USD was at 7.75% at close of trading Wednesday, compared with 7% going into the holiday period. In the spot market, the pair was at USD1.3170 late Wednesday, up around a cent on the previous week.

Although trading volumes were low, traders reported interest in short-dated at-the-money buying from those investors that weren't on vacation. One-week dollar calls and puts were equally bid and cable as well as euro/dollar was a popular cross. The dollar jumped to USD1.95 against sterling Wednesday, up from USD1.97 the previous week. Options expiring Friday, to cover the non-farm payroll release, were also popular.

"People do not want to trade a particular direction," noted one trader in New York. He said there was a New Year feel to the market, meaning trend-following investors have not yet decided where to go. "I think that it's a typical start of the year," agreed another trader.

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