The Euro recovered from a 4 yr low against the US Dollar this week as worries over sovereign debt sparked “panic” in Global markets.

The Euro fell to a low of US$1.2142 vs the USD Wednesday, its weakest level since late April 2006, after a German ban on short selling of European government bonds and some German financial stocks seemed to spook investors. This left the Euro on the firing line as a way for investors to express negative sentiment towards EuroZone growth prospects. But the Euro recovered from its lows as a wave of de-leveraging prompted investors to cut back positions and cover short plays.

Short positions in the Euro were at all-time highs going into this week, and it did not take much to trigger forced buying amid a flood of stop losses.

Some players put the Euro’s rally down to fears that the European Central Bank might intervene in the markets to stem the single currency’s recent slide, however, analysts dismissed the speculation. Beat Siegenthaler, of UBS, said severe market turmoil, extreme price action and erratic policy actions were ideal breeding grounds for unfounded theories. “In our view, neither the level not the volatility of the euro currently provides a rationale for supportive ECB action,” said Mr Siegenthaler. “Rather, we think that the bounce in the Euro has been entirely to do with extreme positioning.”

Hans Redeker, of BNP Paribas, said it was clear that the liquidation of positions that had been funded by selling the Euro was running through the market. He said it had become obvious that the European debt crisis would delay monetary tightening, meaning that the European Central Bank was likely to keep interest rates at low levels for the foreseeable future. He also said that as a result the Euro would be the liquidity provider for global markets, suggesting Euro-funded carry trades, where the purchase of riskier higher yielding assets is funded by selling the single currency, were likely to come back into fashion. “This suggests the current rebound in the Euro against the dollar will run out of steam,” Mr Redeker said.

During the week the Euro rose 1.6% to US$1.2552 vs.the USD and rose 2.2% to £0.8698 against the GBP.

The Aussie dollar was the big victim of the global de-leveraging. Over the week, the it slid 6.7% to a 10-month low of $0.8268 against the USD and dropped 9.4% to Y74.14 against the Yen.

Other commodity-linked currencies suffered with the New Zealand dollar tumbling 4.7% to $0.6735 vs. the USD over the week.

The Yen rose 3% to Y89.72 vs. the USD over the week, climbed 1.2% to Y113.05 against the Euro and gained 3.6% to Y129.55 vs. the GBP.—Paul A. Ebeling, Jnr. www.livetradingnews.com

Posted by Shayne Heffernan on May 23rd, 2010and filed underEurope.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site