Dealers note a large exotic option expiring at the end of the year as the next battle ground for EUR/USD.

Demand for EUR/USD has been virtually across the board but sovereign buyers have been the stand outs. My guess is that reserve managers are back in the business of diversifying reserves after running dollar-heavy books for much of 2012 in anticipation of the European situation metastasizing closer to the core by enveloping Spain and Italy. That has not happened and the ECB safety-net, though not yet deployed, has helped allay fears of a catastrophic Euro zone disaster.

Also helping is optimism that, despite all the bluster, a deal to avert the fiscal cliff will be done in the next few days. Risk sentiment has been improving for much of the month of December and the dollar has fallen as the need for safe-havens dwindles. Same for the JPY, and to a lesser extent, the Swiss franc.