Expectations of a decline in the dollar are felt in options

In the US, expectations for the dollar to rise against emerging market (EM) currencies have fallen to their lowest level since 2007. Options traders’ expectations for the dollar to rise against emerging market (EM) currencies have fallen to their lowest level since 2007, as the upcoming interest rate cuts in the US have increased the appeal of higher-yielding assets. According to an index calculated by JPMorgan, the difference between the premium on three-month put options and the premium on call options against EM currencies, known as the “risk reversal,” has narrowed to 0.90 percentage points this week. This rate was 1.19 percentage points in mid-January. The decline in this rate was accompanied by a decline in implied volatility with similar maturities, signaling that demand for dollar call options has decreased. Although the timing is uncertain, investors now expect that inflation in the US will eventually decline and the Fed will begin to cut interest rates. This supports expectations that the dollar will weaken. A less restrictive environment in the U.S., widening yield spreads, recovering exports in emerging economies and stimulus hopes in China could cause the dollar to weaken against EM currencies, Oversea-Chinese Banking Corp. FX Strategist Christopher Wong predicted.