Euro rises as investors fear positions too short

LONDON - The euro rose broadly on Friday as investors wary of holding too many short positions following its heavy sell-off scrambled to take off those trades, while fears of currency intervention loomed over the market.

By (Reuters)

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Published: Fri 21 May 2010, 6:13 PM

Last updated: Thu 2 Apr 2015, 9:47 AM

In volatile trade, the Australian dollar jumped 2 percent against the dollar, paring losses after its steep fall this week, on chatter that Australia’s central bank may intervene to support the currency. The RBA said it does not comment on market movements.

Investors were jittery about holding significant positions in the euro and other currencies given some market-moving announcements have been made on weekends this month. A task force of European finance ministers meet in Brussels on Friday.

A stampede out of the euro amid worries about the economic impact of the euro zone debt crisis drove the single currency to a four-year low versus the dollar this week and has pushed net short positions in the European currency to a record high.

Analysts say investors are realising the dangers both of holding too many or too few euros, particularly given speculation that authorities may prop up the currency.

“The market has a clear view that the euro will be trending lower, but by holding that position you are vulnerable to any possibility of intervention,” said Daragh Maher, senior currency analyst at Credit Agricole CIB, adding that such fears had extended the euro’s short squeeze in the past few days.

“The intervention threat doesn’t have to feel realistic, when the market is an extreme position, even just a muttering can cause a reaction.”

The euro has fallen roughly 6 percent so far this month, and its steep decline has cranked up speculation that European officials may be concerned about its level.

Eurogroup Chairman Jean-Claude Juncker said on Thursday he did not see the need to take immediate action on the euro’s decline, but speaking in Tokyo, he said he discussed its decline with Japan’s finance minister.

On Friday, the euro climbed as high as $1.2673 on electronic trading platform EBS in early trade, before pulling back to $1.2500 by 1054 GMT up 0.3 percent on the day.

It tumbled as low as $1.2143 earlier this week after Germany banned naked short selling in some securities, fuelling speculation about other possible market regulations.

The euro is poised to end the week roughly 1 percent higher against the dollar, following five consecutive weeks of losses.

Aussie gains

Analysts said heightened fears about risk had prompted a rush to square positions — long and short — in currencies which are high-risk or less liquid. “Risk aversion has risen so rapidly that in order to protect their books, investors are just closing positions and repatriating capital,” said Carl Hammer, currency strategist at SEB in Stockholm, adding: “It’s a snowball effect.” Risk aversion soaked up liquidity, resulting in choppy trade and aggravated currency movements.

Against the Swiss franc, the euro traded 0.5 percent higher at 1.4430, having recovered sharply from a slide to an all-time low of 1.3995 francs earlier in the week.

The Australian dollar rose 2 percent against the U.S. dollar to $0.8318, pulling back from $0.8085 hit on Thursday, its weakest since July 2009.

Germany’s lower house of parliament approved a bill to allow Berlin to contribute to the European rescue aid for Greece and other euro zone nations plagued by debt problems.

European Central Bank President Jean-Claude Trichet meanwhile underlined the need for fiscal tightening, saying Portugal, which many in the market fear risks contagion from Greece’s debt problems, urgently needs fiscal sustainability.

However, the difficulties facing debt-ridden states in tackling high deficits were highlighted by media reports that Spain’s union will probably call a general strike to protest the government’s economic policy.

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