July 6th 2005
Did the USD rise too fast?
In the last 6-8 weeks, the USD has risen 10% against the Euro and 5% against the Yen. The appreciation of the USD was spurred by global economic and monetary uncertainty as well as interest rate differentials that increasingly favored the US. While fundamental indicators continue to support the USD, technical indicators do not. Yen/USD currency options suggest the USD has appreciated too much too fast, and may be due for a correction. This contract is among the most heavily traded forex options and represents investors’ expectations of the future direction of the Yen/USD exchange rate. Recently, the contract began to move in favor of the Yen, suggesting the Yen was due to appreciate. In the past, this kind of dramatic movement in the forward exchange rate has typically been followed by a change in the spot rate, which could potentially spell trouble for the USD. The Wall Street Journal Asia reports:
One options dealer said, "In the options market, people say that when risk reversals favor dollar strength against the yen, [the dollar’s] rise in the spot market is over."