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Wednesday May 19, 2010 - 11:54:11 GMT
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FOREX NEWS - Euro hits 4-yr low vs dlr on German shorting ban (RTRS)

7:08am EDT

* Euro hits 4-yr low vs dollar; Merkel says euro in danger

* German bans naked short selling of some assets

* Euro selling calms in European trade as ban digested

* Dollar index at 14-mth high as investors shun risk

By Jessica Mortimer

LONDON, May 19 (Reuters) - The euro hit a four-year low against the dollar on Wednesday after Germany banned naked short selling of some securities, sparking uncertainty and a fresh wave of risk aversion which lifted the dollar and yen.

Germany banned on Tuesday naked short selling of euro zone government bonds, some stocks and naked selling on credit protection backed by sovereign debt. [ID:nSGE64I073]

The ban triggered anxiety about whether more regulation could follow and other countries would follow suit.

Comments by German chancellor Angela Merkel that the euro was "in danger" further undermined confidence in the single currency. [ID:nLDE64I0Z1]

However, euro selling against the dollar cooled in Europe, with some analysts saying the initial reaction may have been overdone as the ban covered a limited range of transactions.

Naked short selling involves selling a financial instrument without first borrowing it or ensuring it can be borrowed.

"The German announcement came out of the blue, without warning, and there is major uncertainty about what this means, whether others will follow and how they will maintain this," said Stuart Bennett, currency strategist at Credit Agricole.

"The backdrop is a very neurotic market which is inclined to give any euro-related news a negative spin and we have seen standard safe-haven buying of dollar and yen".

At 1030 GMT, the euro was down 0.1 percent at $1.2168 <EUR=>, hovering close to a low of $1.2143 hit in early Asian trade on trading platform EBS. Against the yen <EURJPY=R> it fell 1 percent to a two-week low of 110.88 yen.

Traders said option barriers at $1.22 were taken out and more were lined up at $1.21, $1.20 and right down to $1.15.

The knee-jerk reaction was to sell the euro on the assumption that selling the currency was the only way to bet against European assets, given the limitations placed on selling bonds and some equities.

"The decision does imply that speculators may increasingly focus their attention on the foreign exchange market, suggesting that euro volatility could increase as a result of this decision," said Jane Foley, research director at


Perceived higher risk currencies came under heavy selling pressure, with the Australian <AUD=D4> and New Zealand dollars <NZD=D4> falling to 8-month troughs versus the U.S. dollar and losing more than 3 percent versus the yen.

Investors sought the perceived safety of the dollar and the low-yielding yen. The dollar hit a 14-month high of 87.458 <.DXY> against a basket of currencies, though it fell around 1 percent versus the yen <JPY=>.

The euro has fallen about 15 percent against the dollar so far this year, hammered by concerns Europe's debt problems and austerity measures to combat them could hamper the euro zone's economic recovery.

"The reaction in the euro is due to all the uncertainty that this brings - there have been fiscal problems, liquidity problems and now there is regulation on top of that," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The euro also fell to a record low against the Swiss franc <EURCHF=R> below 1.4000 francs before steadying just above that level, which traders said was seen as the Swiss National Bank's new intervention threshold.

Data showed Swiss currency reserves soared in April, evidence of how much the SNB has had to do to prevent a sharp franc appreciation versus the euro. [ID:nWEA2915]

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