Currency Volatility Falls Most Since 1999 as Dollar Slump Slows

By Stanley White

June 30 (Bloomberg) -- Currency volatility fell by the most since 1999 this quarter, reducing the chances central bankers will seek to bolster the dollar.

JPMorgan Chase & Co.'s index of implied volatility on dollar options against the euro, the yen, the British pound, the Swiss franc and the Australian and Canadian dollars declined 2.38 percentage points to 10.11 percent. It's the biggest drop since the second quarter of 1999.

Diminished price swings are a sign to Goldman Sachs Group Inc., Mizuho Corporate Bank Ltd. and Australia & New Zealand Banking Group Ltd. that central banks will avoid intervening in foreign exchange even after the dollar depreciated 25 percent against its biggest trading partners in the past five years.

Currency swings were muted after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of ``sharp fluctuations in major currencies'' and the ``implications for economic and financial stability.''


``I thought that around $1.60 we were getting close'' to intervention, Jens Nordvig, a strategist with Goldman Sachs in New York, said of the possibility central bankers would buy and sell currencies to influence exchange rates. ``But after the recent events I would say we're not getting close until we reach $1.65.''

The euro strengthened 1.2 percent against the dollar last week and closed at $1.5794. The U.S. currency rose 0.7 percent against a basket of six currencies since March 31, ending a 16 percent slump that started Sept. 30, 2006. The Dollar Index traded on ICE Futures U.S. in New York rose to 72.324 from 71.802 on March 31. The last time central banks stepped in to arrest a slide in the greenback was 1995.

`Warming Up'

``More players are warming up to the idea that the dollar will remain in a range,'' said Ryousei Ishida, senior vice president of foreign exchange options in Tokyo at Mizuho, a unit of Japan's second-largest publicly traded bank. The outlook is spurring traders to use strategies that benefit when currencies are little changed, he said.

The median estimate of 46 strategists surveyed by Bloomberg is for the dollar to trade at $1.54 per euro by Sept. 30. The median yen forecast is 104 per dollar, compared with last week's closing price of 106.13.

Double-No-Touch

Some traders are buying ``double-no-touch'' options to bet the dollar will be little changed against the yen, Ishida said. Another strategy is to sell ``straddles'' with strike prices near the current level in the spot market as they would benefit from a further decline in volatility, he said.

A double-no-touch pays the buyer a fixed amount should the underlying currency remain between two levels during the life of the option. A straddle is a call and put with the same strike price and duration. Calls grant the right to purchase currencies, while puts allow sales. The strike price is where an option may be exercised.

Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs. The dollar's plunge also contributed to rising prices for raw materials that sent oil, copper and iron ore to record highs.

``Policy makers have been trying to engineer more stability in foreign exchange markets and they've succeeded,'' said Tony Morriss, a Sydney-based currency strategist at ANZ, Australia's third-largest bank. ``They need a stable dollar to ensure commodity prices don't continue to rise.''

Volatility implied by dollar-yen options expiring in one month fell to 11.5 percent from 17 percent on March 31, the biggest quarterly percentage drop since the second quarter of 2000.

Credit Gambit

Volatility may rise as credit market losses from the U.S. subprime mortgage collapse spread, according to Sean Callow, senior currency strategist in Sydney at Westpac Banking Corp., Australia's fourth largest lender. Financial companies posted $400 billion in losses related to subprime-contaminated securities, according to data compiled by Bloomberg.

``We're expecting a very volatile quarter,'' Callow said. ``There are plenty of signs of ongoing stress in capital markets. We're bearish on the dollar.''

The dollar decline ended this quarter as Federal Reserve Chairman Ben S. Bernanke said on June 3 he is ``attentive'' to the possibility that the dollar's slump will cause inflation expectations to rise. Treasury Secretary Henry Paulson said June 9 he hasn't ruled out intervention to prop up the U.S. currency.

The Fed ended a run of seven interest-rate cuts last week, keeping its target rate for overnight loans between banks at 2 percent. The dollar traded between $1.5303 per euro and $1.5843 since June 3.

``The market appreciates the unusual nature of Bernanke's and Paulson's comments,'' said Takeharu Miki, a currency options manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``This should help support the dollar and keep volatility stable.''

Miki said he is looking for opportunities to sell options to profit from further declines in volatility. The dollar will swing between 105 yen and 110 yen next quarter, he said.

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