Options traders are betting that the euro will stay resilient in the coming weeks amid the biggest turnaround for the currency in at least 12 years.
The relative cost of protecting against a euro decline versus the U.S. currency has fallen 1.66 percentage points in July, set for its biggest monthly drop, according to data on one-month risk reversals going back to October 2003.
Europe’s single currency weakened 0.6 percent against the dollar this month, the smallest decline among 16 major peers, as Greece inched toward a bailout deal. A deepening slump in commodities and a global stock market rout also reduces the likelihood that the Federal Reserve’s will raise interest rates, contributing to the euro’s strength.
“In the near term, risk aversion leading to lower U.S. rate hike expectations, and investors cutting short positions in euro may contribute to gains in the currency,” said Greg Gibbs, a strategist at Royal Bank of Scotland Group Plc in Singapore. “Over the long run, the euro is likely to remain in a downtrend owing to its quantitative monetary policy measures. That is unlikely to be changed for the foreseeable future.”
Analysts raised this month their end-September forecast for the single currency to $1.08, from $1.04 as recently as in May, according to the median estimate. The euro will extend its decline to $1.05 at the end of the year, analysts predict. The euro fell 0.1 percent to $1.1082 on Tuesday at 6:22 a.m. in London.
The premium on contracts to sell the single currency over those to buy declined to 23.75 basis points Tuesday, according to data on risk reversals compiled by Bloomberg. That’s the lowest premium since October 2013.
Greece tapped a 7 billion-euro ($7.8 billion) temporary loan this month to avoid defaulting on the European Central Bank.