THE EURO remained near eight-month lows versus the dollar on world currency markets yesterday, as investors continued to fret about debt problems in Greece, Portugal and Spain.
The single currency fell to $1.3583 on Friday and recovered a little to $1.3683 yesterday as sentiment toward the euro soured because of increasing concern over the fiscal difficulties in Greece and its consequences for the future of the euro zone.
It also emerged yesterday that traders and hedge funds have bet nearly $8 billion against the euro, amassing the biggest ever short position in the single currency. Such traders will now stand to benefit financially if the euro zone debt crisis is not contained.
Figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity, showed investors had increased their positions against the euro to record levels in the week ending on February 2nd.
It suggests investors are losing confidence in the single currency’s ability to withstand any contagion from Greece’s budget problems to other European countries.
Persistent concerns about sovereign risk left financial markets struggling to find a clear direction yesterday as a weekend meeting of G7 finance ministers did little to reassure investors.
Tensions were further ratcheted up by a warning from a Greek public sector union of further possible strikes following recent austerity measures unveiled by the government.
“It seems that the market won’t rest until we get what is increasingly likely to be a European Union bailout for the peripheral nations,” said Jim Reid, strategist at Deutsche Bank.
But he warned: “If the situation in Europe receives a large sticking plaster, then this may be the catalyst for speculators to start looking elsewhere for weak targets. The UK and US would be candidates, even if we still think such an event in the US is probably more likely to be beyond 2010.”
Thomas Stolper, economist at Goldman Sachs, said: “Behind this intense focus on Greece obviously is the long-standing unresolved issue of how to enforce fiscal discipline in a currency union of sovereign states.”
Speculation that Greece’s financial woes will spread have roiled markets, triggering the biggest slump in European stocks in 11 months last week and an increase in the cost of insuring against losses on European corporate bonds.
Trading on the Iseq index of Irish shares was reported to be “volatile” by Dublin dealers yesterday, although a recovery in US stocks in the afternoon helped the index close in positive territory.
In a move reminiscent of Minister for Finance Brian Lenihan’s attempts during 2009 to restore international confidence in the Irish economy, the Spanish government has hit back at its critics, arguing that it is being unfairly treated by foreign investors and the media.
José Blanco, Spain’s public works minister, hit out at “financial speculators” for attacking the euro and criticised “apocalyptic commentaries” about Spain’s finances. – (Additional reporting Financial Times/Bloomberg)
