Euro Rally May Wane as Options Drop From Record on Rate Concern

March 26 (Bloomberg) -- Traders trimmed bets the euro will gain versus the dollar on speculation the European Central Bank will lower interest rates to bolster the region’s economies, options show. The euro’s one-month 25-delta risk-reversal rate against the dollar shows that premiums on euro call options over put options fell from record highs. The rate slid to as little as 0.55 percent yesterday, a one-week low, Bloomberg data show. It stood at 0.72 at 11:20 a.m. in Tokyo, from 1.17 on March 20, the most since Bloomberg started compiling the data in 2003.

“Risk-reversals have been skewed to euro bulls,” said Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank AG. “The European currency should naturally be sold after a sharp surge and may weaken in the long run,” as the pace of Europe’s economic recovery is likely to be slower than in the U.S., he said. The euro strengthened 7.4 percent against the dollar since Feb. 28, heading for its first monthly gain this year, after the U.S. central bank started buying Treasuries, raising concerns that will debase the value of the greenback. A call option gives its holder the right without obligation to buy an underlying asset while a put option gives the holder the right to sell an asset. Risk reversals measure demand for calls and puts.

‘Put Over’ Reverses

The euro-dollar risk-reversal stayed so-called “put over” for most of the first two months of the year, where demand for euro puts exceeds that for calls, indicating traders expect the 16-nation currency to weaken. The trend reversed in the middle of this month as concerns intensified that the Federal Reserve’s efforts to lower interest rates would revive inflation. As much as 10 billion euros ($13.6 billion) worth of euro put-dollar call options were bought on March 24 with a strike price of $1.30 per euro set to expire in a month, according to Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

The euro weakened as much as 1.5 percent against the dollar on that day, the biggest decline since Feb. 17. Implied volatility, a measure of expectations for future currency moves, on one-month euro-dollar options rose to about a month-high at 18.76 percent early this week and stood at 17.93 percent today in Tokyo. The euro traded at $1.3587 in Tokyo from $1.3583 late in New York yesterday. The 16-nation currency has fallen 2.6 percent against the dollar since Dec. 31, heading for its fourth quarterly decline, the longest streak of losses in three years.