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Currency traders, including hedge funds, are increasing option bets on further dollar gains after the Fed's hawkish decision this week fueled expectations for higher interest rates in the US.
On Wednesday, leveraged funds began buying dollar call options, which appreciate when the US currency strengthens, traders said. Demand continued on Thursday as investors digested new Fed Chairman Kevin Warsh's firm commitment to returning inflation to target.
"We're seeing strong interest in buying dollar call options, particularly in G10 currencies," said Tobias Jungmann, head of currency options at Bank of America in New York.
Going long on the dollar through options looks "attractive" given the current low level of implied volatility, he noted. Call options betting on the dollar's rise against the pound jumped more than fivefold on Thursday compared to put options betting on the dollar's decline, according to CME Group.
Dollar-euro options trading rose to the highest since March 3, with large call contracts worth €200 million ($229 million) or more nearly double the volume of comparable put options, according to Depository Trust & Clearing Corp.
"We are seeing significant demand for dollar calls across the board, particularly in EUR/USD and GBP/USD through conventional and digital shorting tools," said James Swindell of Barclays Bank.
The Bloomberg Dollar Spot Index rose for a third straight day on Friday and is on track for a 1% weekly gain, as traders fully priced in a quarter-point Fed rate hike by October.