Derivatives traders see at least a year of pain for the euro even after the currency surged the most in eight months following the approval by European Union leaders of measures making it easier for Spain and Italy to obtain aid. The 17-nation euro rallied as much as 2 percent against the dollar on June 29, yet option traders are still the most bearish ever on the currency versus the greenback over the next 12 months compared with the next 90 days. More than 50 economists and strategists surveyed by Bloomberg cut their median year-end estimate to the lowest since at least 2007. Enlarge image Derivatives traders see at least a year of pain for the euro even after the currency surged the most in eight months following the approval by European Union leaders of measures making it easier for Spain and Italy to obtain aid. Photographer: Hannelore Foerster/Bloomberg While EU officials granted immediate relief to the debt markets of Spain and Italy, German Chancellor Angela Merkel maintained her opposition to joint bonds backed by the Risk Reversals The euro fell 0.2 percent to $1.2648 at 9:50 a.m. London time, from June 29 when it closed 1.8 percent higher. It’s down 2.4 percent this year. The shared currency slipped 0.3 percent to 100.79 yen today. It was 0.1 percent lower in a basket of 10 major currencies based on data compiled by Bloomberg. The euro, which began trading at about $1.17 in January 1999, has ranged from 82.3 U.S. cents in 2000 to $1.6038 in 2008, averaging about $1.21 over its lifetime. One-year options show that the premium for puts, which grant the right to sell the euro versus the dollar, over calls, which confer the right to buy, is the highest relative to three month contracts since Bloomberg began tracking the data in 2003. The gap between the so-called 25-delta risk reversal rates reached 1.06 percentage points. The difference between the two gauges has averaged less than 0.1 percentage point since 2003. Risk reversals measure the difference between implied volatility, or a gauge of price and demand, on similar puts and calls. Traders pay a premium for puts when they expect the euro to decline. ‘Worth Paying’ “That’s a premium worth paying,� Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London, said in a June 26 phone interview. “The euro will exist in the long run, but things have to get worse first. A fall in the euro to $1.15 isn’t particularly aggressive, and parity is possible. Historically, the euro has traded much lower.�The level of the spread between the two different maturity risk reversals is 3.88 standard deviations from its mean. Greater than three standard deviations is defined as occurring less than 0.3 percent of the time in a statistical model of data that follows a standard normal distribution. Investors betting against the euro may be underestimating the determination of Europe’s leaders to push through reforms, said Gavin Friend, a London-based markets strategist at National Australia Bank Ltd. The dollar may weaken at the prospect of the Federal Reserve creating more money and buying bonds, a policy known as quantitative easing, he said. Last week’s EU summit was “an encouraging step, though there’s clearly more to do,� said Friend, who expects the euro to climb to $1.33 by year-end. Dollar Focus Investors and traders may now turn their attention to the dollar, sending it lower on the prospects of more QE from the Fed when it next meets Aug. 1 to decide monetary policy, Friend said. After the policy makers agreed on June 20 to extend its $400 billion Operation Twist program by swapping an additional $267 billion of short-term securities for longer-term debt, Chairman Ben S. Bernanke said in Washington that the central bank is “prepared to take additional steps if appropriate.�The euro’s advance on June 29 was its first in five days as 13 1/2 hours of talks in Brussels ended with EU leaders paving the way for cash-strapped lenders to tap Europe’s bailout funds directly once they establish a single banking supervisor. Until now, they had to get aid through their governments, piling pressure on already stretched national coffers. The European Central Bank will play a role in the new supervisory body, officials said. They also agreed to drop a requirement that taxpayers get preferred creditor status on emergency loans to Spanish banks. Other steps included agreeing to use rescue funds to stabilize markets under some conditions.

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