Bets on a stronger dollar are getting more expensive in the options market.

(Bloomberg) - The cost of betting on further dollar gains in the options market rose to the highest since November as the U.S. economy's resilience pushed demand for the greenback.

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The Bloomberg Dollar Spot Index climbed to a five-month high as Treasury yields jumped after stronger-than-expected retail sales data prompted traders to reduce bets that the Fed will cut interest rates this year. The dollar has risen to a 34-year high against the yen, and reached a five-month high against the euro, British pound, Australian dollar and New Zealand dollar.

The buying frenzy for the dollar has even fueled speculation that the greenback will regain parity against the euro for the first time since November 2022. Leveraged funds are now holding their biggest bets in more than two years that the dollar will rebound further.

However, investors looking to profit from a further rise in the dollar by buying call options, which increase in value if the dollar strengthens, are finding that this comes at a higher price. The premium for speculating on the dollar's rise over the next three months has risen to its highest level since November compared with the dollar's decline.

"Markets are now beginning to look at the risk that the dollar could return to last year's highs and hedge accordingly," said Simon Harvey, London-based foreign exchange analyst at Monex Europe Ltd. In this case, three-month options are of particular interest, as we suspect interest rate differentials should diverge significantly in the second quarter, favoring further dollar appreciation.

The bullish option premium may be limited if the dollar faces resistance to further gains. The Bloomberg Dollar Spot Index's Momentum Indicator Slow Stochastic has entered oversold territory. This suggests that further upside for the dollar may be limited in the near term.

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