Hedge fund speculators retreat as euro holds fast | Business| Economy and finance news from a German perspective | DW | 06.08.2010
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Hedge fund speculators retreat as euro holds fast

The euro dipped to a low value in May and June, but recently regained its lost value. Fears of the currency would collapse did not materialize, and hedge fund bets against it are now a fraction of what they were in May.

One euro coins stacked up

The euro is holding its value despite negative predictions

Positive economic data from both Spain and Greece, a dollar weakened by disappointing economic progress in the United States and indicators of substantial economic growth in Germany have led to losses for negative euro speculators.

Rolf Schneider, an economist with the Allianz Group and Dresdner Bank, described the euro as a stable currency.

"Anyone who was betting on the collapse of the euro in this case definitely bet on the wrong horse," he told Deutsche Welle. "At the moment the euro is not positioned to really fly high, but it is definitely a stable currency."

In early June, the euro reached a low value of under $1.20. By the beginning of August, however, it had recovered to a value of more than $1.30, its approximate value before the two-month dip began.

The German newspaper Handelsblatt reported Wednesday that "macro-funds," which seek to profit from economic imbalances in global markets, lost 1.2 percent of their average value in the first half of the year. It also reported the funds' bets on a declining euro were estimated at 24,000 by the end of July, down from more than 100,000 in May.

According to Schneider, the fact that hedge funds are withdrawing their bets against the euro could be a "self-reinforcing development" in favor of the euro. Still, he said he expects the 16 nations' shared currency to be worth about $1.25 by the end of the year.

Spain and Greece recovering

Photo montage of the Parthenon and a dropping stock curve

Greek legislators have managed to nearly halve the country's new debt

The dip in the euro's value came about in part because of the debt crisis in Greece and Spain. Greece has managed to nearly halve its newly-incurred debts, and the Spanish economy is now showing signs of growth, according to Schneider.

"What is certainly important is that no recession came about, and instead economic indicators in Europe were very good overall. Germany is in the lead, but we estimate the Spanish economy is also growing again," he said.

To slow speculation surrounding the Greek debt crisis, the German government enacted a domestic ban on the "naked short selling" of eurozone government debt. However, the majority of European short selling occurs in London. In short selling, speculators sell a borrowed stock or bond and expect it will lose value. If it does, they can buy it back for less, return it to the lender, and profit from the difference in sale prices.

Also, an international bailout for Greece was financed in part by 148 billion euros ($186 million) from Germany. The threat to the common European currency represented an existential dilemma for the European Union, but now Greece and Spain are now having first successes in their efforts to consolidate debts.

"Markets expected that the debt crisis would become more intense and expand," Schneider said. "Now the fundamental data does not indicate a rise to new heights, but instead it points to a stable currency. At the moment there is a large amount of skepticism about the US economy, but we believe that will even out by the end of the year."

'Horror scenarios' didn't emerge

A German stock exchange

Speculation on the decline of the euro has diminished

The horror scenarios which were imaginable in the eurozone at the beginning of the year did not come to pass, according to Jochen Mobert, an analyst with Deutsche Bank Research who added that euro's recovery can in part be attributed to the speculators' retreat.

"When it comes to debt consolidation, all of the affected countries are actually above their goals and making good progress," he told Deutsche Welle. "Even though there are still structural weaknesses and skepticism remains, at the moment there is more positive news than negative."

The US economy was growing at about 4 percent during the winter, but suffered a very weak month in June. July represented a slight improvement, but was still far below 4 percent, according to Mobert.

"That makes for a weaker dollars and a stronger euro," he said. "And the euro didn't lose as much value as was expected. It didn't turn out that way… maybe some people bet a bit too short on the euro."

Author: Gerhard Schneibel
Editor: Sean Sinico

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