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March 1st 2010

Speculators Pile Up Against Euro

The Wall Street Journal’s coverage of the Greek dent crisis has focused less on the crisis itself, and more on the markets’ reaction to it. With headlines like “Hedge Funds Try ‘Career Trade’ Against Euro” and “Speculators Bet Record Amount Against Euro For 4th Week” and “Europe Trouble, U.S. Opportunity” – among others – the WSJ has identified a collapse in the Euro (mainly against the Dollar) as one of the most prominent (and profitable!) strategies for exploiting the crisis.

As I mentioned in the last post (“Understanding the Greece Situation“), the debt crisis has become self-fulfilling, not only for Greece, but also for the Euro. In other words, as perceptions abound that Greece is insolvent and the Euro is doomed, Greek bonds and the Euro have lost value, which only makes the crisis worse. It seems that speculators are taking advantage of this phenomenon by making large bets against the Euro. In fact, large is an understatement, as the net short positions against the Euro now total a record $12 Billion, according to the closely watched Commitment of Traders report.

Some analysts have taken such information at face value, noting that “The fact that the shorts got even shorter when they were already at extreme levels highlights just how negative the sentiment is toward euro.” On the other hand, there is evidence (and some degree of admission) that large speculators are now acting in concert to bring down the value of the Euro. The WSJ reports mention private meeting between hedge funds managers and investment banks helping their clients bet against the Euro using derivatives. For those that are skeptical that speculators could really influence currency markets, consider that one man – George Soros – single-handedly forced a devaluation of the Pound in 1992, and made $1 Billion in the process. While the Euro is certainly bigger than the Pound ever was, there are more people watching it than ever, and when there is money to be made –  hundreds of billions of dollars in this case – it isn’t inconceivable that the Euro could suffer a similar fate.

Already, there is evidence that this strategy is working, as the Euro has fallen 10% in less than three months, which is unbelievable for a currency whose daily trading volume is estimated at $1.2 Trillion. In fact, one popular options trade is based on the the Euro falling to parity against the Dollar. Once unthinkable, such a possibility now faces odds of “only” 1 in 14 (based on options premiums), compared to 1 in 33 in November. On the one hand, it’s frustrating to accept the market power that these speculators have. But emotion has no place in (forex) trading, and standing in the way of momentum would be costly.

On the other hand, Euro fundamentals remain strong. To be sure, a currency is only as strong as its constituent parts, and the fact that a handful of EU member states have shaky finances certainly cannot be dismissed. At the same time, the fact that such currencies have no direct control over the Euro is just as important. Before the inception of the Euro, currency traders would be justifiably concerned that a country in a similar position to Greece would deliberately devalue its currency (by printing money) in order to devalue its debt and make it more manageable.

Now, this would be impossible, since the Euro is controlled by the European Central Bank, over which Greece has no power. The current crisis in Greece notwithstanding, “The European Central Bank’s (ECB) resolve to maintain sound money is…important. This is especially true for the ECB, which has a single mandate—price stability—unrelated to fiscal problems.” While there is legitimate concern that the ECB will be forced (or voluntarily) print more money to fund bailouts of bankrupt EU member states, this doesn’t seem very likely, given the history of the ECB. Its monetary policy has always been quite conservative, and it’s no wonder that the Euro has come to be seen as a viable alternative to the Dollar.

In my opinion, the decline in the Euro is mostly baseless, and if it were to continue, it wouldn’t represent the prevailing of logic. Then again, logic is not exactly a word that I would apply to the forex markets, now or ever.

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Posted by Adam Kritzer | in Euro, Investing & Trading, News | 4 Comments »

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4 Comments of “Speculators Pile Up Against Euro”

  1. Simon Says:


    This is a great article.

    One thing I do not understand, and which no-one seems to be addressing is this:

    – The Euro is sinking fast against the dollar.
    – The British pound is being talked down – 88p to the Euro and near parity with the dollar have been suggested.
    – The dollar has lost enormous value, hence the rise in gold.

    All three currencies are losing value against various benchmarks. All appear to be in trouble.

    Which currency will win out in the mid to long term and will a new currency be introduced as the global standard currency to replace the dollar?


  2. Don Miat Says:

    The Euro is heading into a pitfall, The Greece situation together with the comming spain and portugal debt problems are pressuring the Euro.

    Euro will drop against the dollar when the S%*T hits the fan. Simply unbelievable that europe didn’t see this comming. This is a major issue that will equalize the dollar and Euro.

    This will set forward a new crisis in europe which will affect the whole worlds economy. Not as largely as the last crisis but just enough to tumble the stock markets.

    Ofcourse this is a great opportunity to trade the forex market.

  3. Best Forex Trading Center Says:

    Hello Adam,

    Thanks for your detail explanation of what is happening within the Euro zone. I am watching my EUR/USD chart with interest. My weekly chart gave me a signal buy signal back in May 3, 2009 So I bought Eur/usd at 1.3645. And my exit signal occured November 1, 2009 and I closed the trade at 1.4845. Patience is required to really succeed in forex. My next trading signal to go short occurred on December 6, 2009. So I sold the pair EUR/USD at 1.4611. It is currently at 1.3622 and my stop is at 1.4155. I change my stop every week. This way, emotions are out of the way and I just let the charts let me know what to do.

    Fundamental analysis I am not very keen with. I just follow my setup signals on my weekly charts. And do so on other pairs. Goodluck with everyone trading. Day trading the currency market is very risky if you not intellectually and psychologically prepared for the challenges.

  4. meister Says:

    I think that: the euro is an economic unity, not a unified polity, which is destined to the euro passive. The future of the euro will be a long time in a weak position.

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