The European single currency, Euro, fell briefly below $1.05 for the first time in six weeks on Wednesday, February 22, hit by a combination of concern over France’s presidential election campaign.
So far, concern that anti-EU candidate Marine Le Pen could win in May and deliver a fatal blow to the euro project have played out chiefly on the options market, where investors pay less to bet on the currency falling.
Three-month risk reversals – the weight of bets against the euro over bets on its strengthening – hit their most negative in more than a year, surpassing levels seen after Britain’s vote to leave the European Union last year.
Implied volatility for the next three months, which allows investors to protect themselves from swings in the currency – or bet on such volatility – rose to the highest since mid-December. EUR3MO=
Those moves are also beginning to seep into spot prices of the euro, which are down around 2 percent in the last three weeks and fell as low as $1.0497 in morning trade in Europe.
“This is politics as well as markets increasingly betting on an imminent rate hike by the Fed,” said Commerzbank strategist Thu Lan Nguyen.
“Volatility is rising as investors start to prepare for the elections. I think investors are going to play this (the elections) on the OPTIONS MARKET. If you go short euro and you are wrong, it is too directional.”
Meanwhile, the dollar was stronger for the second day running, gaining around a third of a percent against the basket of currencies used to measure its broader strength, Reuters reports.
But it dipped around a third of a percent against the yen, which tends to benefit when investors grow more worried about global political risks. JPY= Against sterling, the dollar gained 0.1 percent to $1.2466.
