Implied volatility of three-month options for Group of Seven currencies touched 7.87 percent, the lowest level since Oct. 18, 2007, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark rates more attractive because it shows the risk is smaller that market moves will erase profits on such trades.
Even so, the UBS AG V24 Carry Index, which measures returns from borrowing in lower-rate currencies to buy higher-yielding ones in so-called carry trades, has fallen 2.8 percent from a four-month high on Aug. 9.
Bloomberg Correlation-Weighted Indexes show that the worst- performing major currency in the past month was the Australian dollar, typically a beneficiary when investors are bullish on the economy because the nation has the highest interest rates among developed economies.
The euro may appreciate to $1.30 if the Federal Reserve announces another round of quantitative easing, Athanasios Vamvakidis, head of G-10 currency strategy at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “On the Move” with Mark Barton.
“The increase of demand for the risk has supported the euro,” he said. “If we get QE, or to some extent it’s priced in, we may see some further strengthening.”
The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of its quantitative-easing strategy. In an Aug. 31 speech, Fed Chairman Ben S. Bernanke defended his unprecedented policies and laid out arguments for further action to combat unemployment, which he called a “grave concern.”
The central bank’s policy-setting Federal Open Market Committee will start a two-day policy meeting on Sept. 12 amid speculation it will introduce a third round of asset purchases.
Barclays Plc forecast the FOMC will announce this week open-ended asset buying or purchases of as much as $500 billion through mid-2013 to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. and BNP Paribas SA, responding to last week’s report of slowing job growth, said an open-ended purchase plan may be announced on Sept. 13.
Australia’s dollar weakened as separate reports indicated the pace of global growth may be slowing.