European investors anticipate dollar strength versus the euro

Investors in Europe are still looking to invest in structured products that take bets on the US dollar appreciating against the euro, despite the European Central Bank's (ECB) move to raise interest rates by 25 basis points to 4.25% on July 3. Many of the products launched, mainly in Italy and Germany, are targeted at investors anticipating rising US interest rates and therefore a stronger dollar.

"The ECB's move has changed market dynamics and slightly dampened interest in products which bet on the dollar appreciating," says Alberto Garcia Elias, London-based head of European structured retail products at Credit Suisse. "About two months ago there were many investors across Europe expressing an interest in this trade. But despite the lessening demand, investors think the European economy might be headed for a slowdown, which could lead to the dollar rising against the euro. Investors are taking this as a medium-term view."

Credit Suisse recently traded an auto-callable product worth EUR70 million in Italy. The five-year 100% capital guaranteed certificate links to the euro and dollar and provides a 6% coupon for the first year. Over the next four years, the product is callable if eight days before the redemption date the EUR/USD fixing value is at or below the strike (initially 91%). In the second year the product provides a redemption amount of 107%, rising to 114% in year three, 121% in year four and 128% in year five.

Although there are fewer requests for bullish dollar products post the ECB's rate hike, Tamas Korchmaros, director for FX structuring at RBS Global Banking and Markets in London, believes that short-term range products could prove popular with investors who remain slightly bullish on the dollar. "We have seen some ideas on the back of high volatility for range products which take the view that the dollar won't sharply appreciate nor depreciate against the euro," he says. "These products could be very attractive, especially given that implied volatilities are relatively high compared to the levels seen in 2006."

RBS recently launched the Power Range Note linked to the EUR/USD. The note is a two-year 100% capital protected product, which pays a 10% pa coupon on a quarterly basis as long as none of the daily discrete spot fixings are outside the respective range (spot +/- 0.0800, reset on a monthly basis). If one of the fixings is out of the range no subsequent coupons will be paid.