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Friday May 21, 2010 - 10:07:47 GMT
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FOREX NEWS - Euro rises on fears positions too short

5:45am EDT

* Euro broadly higher, short squeeze continues

* Intervention fears heighten risk aversion

* Australian dollar rises sharply, trims steep losses

(Adds comment, details, updates prices)

By Naomi Tajitsu

LONDON, May 21 (Reuters) - The euro rose broadly on Friday as investors wary of holding too many short positions following its heavy sell-off scrambled to take off those trades and fears of currency intervention rose.

In volatile trade, the Australian dollar jumped, paring losses after its steep fall this week, on chatter that Australia's central bank may intervene to support the bruised currency. The RBA said it does not comment on market movements.

A stampede out of the euro due to worries about the broad economic impact of the euro zone debt crisis drove the euro to a four-year low versus the dollar this week and has pushed net short positions in the European currency to a record high.

Analysts say that with risk aversion haunting the market, investors are realising the dangers both of holding too many or too few euros, particularly given speculation that authorities may prop up the euro.

"The market has a clear view that the euro will be trending lower, but by holding that position you are vulnerable to any possibility of intervention," said Daragh Maher, senior currency analyst at Credit Agricole CIB, adding that such fears had extended the euro's short squeeze in past days.

"The intervention threat doesn't have to feel realistic, when the market is an extreme position, even just a muttering can cause a reaction."

The euro has fallen roughly 6 percent so far this month, and its steep decline has cranked up speculation that European officials may be concerned about the euro's level.

Eurogroup Chairman Jean-Claude Juncker said on Thursday he did not see the need to take immediate action to halt the euro's decline. [ID:nTOE64I038].

However, speaking in Tokyo, he said he discussed the common currency's rapid plunge with the Japanese finance minister.

On Friday, the euro <EUR=> climbed as high as $1.2673 on electronic trading platform EBS in early trade, before pulling back to $1.2545 by 0921 GMT, up 0.6 percent on the day.

The euro tumbled as low as $1.2143 earlier this week after Germany banned naked short selling in some securities, fuelling speculation about other possible market regulations.

It is poised to end the week 1.5 percent higher against the dollar, following five consecutive weeks of losses.


Analysts said that heightened fears about risk had prompted a rush to square positions -- long and short -- in currencies which are high risk or less liquid. "Risk aversion has risen so rapidly that in order to protect their books, investors are just closing positions and repatriating capital," said Carl Hammer, currency strategist at SEB in Stockholm, adding: "It's a snowball effect." Risk aversion shrivelled up liquidity as investors clamour for dollars, which was resulting in choppy trade and aggravated currency movements.

Against the Swiss franc, the euro <EURCHF=> traded 0.5 percent higher at 1.4430, having recovered sharply from a slide to an all-time low of 1.3995 francs earlier in the week.

The Australian dollar <AUD=D4> rose 2 percent against the U.S. dollar to $0.8318, pulling back from $0.8085 hit on Thursday, its weakest since July 2009.

It jumped as much as 5 percent versus the yen to 75.53 yen <AUDJPY=R>, pulling back from a slide to a 10-month low near 71.90 yen in early Asian trade.

The yen was broadly weaker, stung by the unwind in short positions in higher-risk currencies. The dollar <JPY=> rose 0.6 percent to 90.12 yen, while the euro <EURJPY=R> rose 1.8 percent against the yen to 113.14 yen.

(Editing by Nigel Stephenson/Ruth Pitchford)

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