Feb. 14 (Bloomberg) -- Currency options show the dollar may rebound to around 110 yen in the next few weeks, said Takeharu Miki, currency options manager in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd.

The spread between the one-month and one-year risk reversal rate has started to narrow, showing options traders are speculating less on a decline in the U.S. currency, Miki said. Risk reversals are the difference between the cost for call options, which grant the right to buy a currency at a fixed price, and puts, which allow sales.

``I'm watching this term structure because it's all about sentiment,'' Miki from the unit of Japan's biggest publicly traded lender, said in an interview in Tokyo. ``This spread will narrow when the dollar starts to recover. I see the potential for a rise in the currency.''

The dollar traded at 108.24 yen at 6:05 a.m. in London from 108.33 late yesterday in New York, when it rose to a one-month high of 108.38. The U.S. currency has gained 1.6 percent against the yen since the start of this month. It fell 10.5 percent over the past year.

The one-year 25-delta risk reversal rate for dollar-yen options was 1.275 percentage points more than the one-month rate today, down from an almost four-year high of 2 percentage points on Dec. 7. Delta measures the change in the price of an option relative to moves in the underlying currency.

Less Risk

Volatility implied by dollar-yen options expiring in one month with a strike price near current levels fell to 11.15 percent from 11.40 percent yesterday and 12.05 percent at the start of the week. Traders quote implied volatility, a measure of expectations for future currency swings, as part of pricing options.

``Implied volatility is starting to come off a little,'' said Miki. ``Today people are less wary of downside risks to the dollar. Stock markets are stable, so people feel there is less risk of financial turmoil.''

The Nikkei 225 Stock Average surged 4.1 percent today, the biggest gain in almost three weeks. The dollar-yen's correlation with the Nikkei is 0.93 in the past six months, according to data compiled by Bloomberg. A value of 1 means two variables move in lockstep.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

Last Updated: February 14, 2008 01:06 EST