Euro and yen volatility against the dollar looks like gaining momentum in coming weeks, according to the monthly Reuters foreign exchange poll which saw a less turbulent month ahead for sterling. Signs of weaker US growth have hammered the dollar in recent weeks, with the greenback hitting a three-month low earlier this week against a basket of currencies.
With economic indicators in Europe still painting a mixed picture of the recovery, calculations derived from the standard deviation of forecasts in the latest Reuters poll showed euro trading against the dollar becoming more volatile in August. The calculations implied monthly annualised volatility of 14.3 percent for the euro against the dollar in August, up from the 11.7 percent seen in July.
Figures last week showed US economic growth slowed to a 2.4 percent annual rate in the second quarter and on Monday, Federal Reserve Chairman Ben Bernanke said the economy was still far from realising a full recovery. This lacklustre growth in the United States coupled with some surprisingly strong economic data in the euro zone in July pushed the euro to a near 10-week high of $1.3125.
For the yen against the dollar, the poll suggested a volatility level of 9.9 percent, slightly higher than the 9.7 percent actual volatility seen last month. And for sterling against the dollar, volatility was seen falling to 9.5 percent this month from an actual 10.6 percent in July.
The UK economy's unexpectedly strong growth of 1.1 percent in the second quarter helped sterling to hit a six-month high versus the dollar of $1.5987 on Tuesday. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month.
Statistical analysis suggests that the more analysts' forecasts diverge for a currency pair, the higher the actual one-month annualised volatility is likely to be in that currency in the following month. Estimates of future monthly annualised volatility are used to calculate the value of currency options, which give investors the right to buy or sell a currency at a fixed price in the future. Generally, as a measure of financial risk, the wider the expected trading range for a currency, the higher the cost of purchasing an option to trade it.