NEW YORK: The euro swung to its highest level against the dollar in nearly 3 weeks on Monday as expectations Greece will reach a deal with its creditors prodded investors to pare bets against the currency, but did little to sway negative sentiment.
The euro also gained against the yen, hitting a three week high. Fundamentally, a slew of factors signal a weaker euro, but with net euro short positions hitting a fourth straight record high in the week ended Jan. 17 the currency has recently been prone to bouts of short covering, or bets the currency will fall.
Germany and France pressed for a rapid deal between Greece and its private creditors that cuts its soaring debt to sustainable levels. They said they were committed to sealing a new bailout for Athens by March to avert a disastrous default.
Failure to reach a deal would trigger a messy default that would hurt the entire euro zone and send tremors beyond the 13-year old single currency bloc. On Monday, however, optimism prevailed.
Greece aims to submit a final debt swap offer to its private sector bondholders by Feb. 13, a finance ministry official said on Monday.
"With EUR/USD short positions at their highest level ever, we are seeing nothing more than short covering," said Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey. "Whether you believe in a Greek PSI (private sector involvement) deal or not, the downward momentum in the EUR/USD is fading quickly."
In late New York trade the euro was up 1.3 percent at $1.3034, but down from a session high of $1.3052, its highest level since early January. Against the yen, the single currency rose 1.3 percent to 100.32 after hitting a session high of 100.48, its best since Dec. 30.
DailyFX, using daily client trading data, showed the ratio of long to short positions in the euro/dollar on Monday dropping to -1.25, with nearly 55 percent of traders short. In the prior session, the ratio was at -1.60, with 62 percent of positions short.
One-month euro/dollar implied volatility rose to around 11.26 from 11.05 on Friday, but it has been trading below its 50- and 100-day moving averages for over a month, suggesting easing anxiety about the euro zone debt crisis.
"Sentiment continues to outweigh fundamentals, at least for the time being," said Brad Bechtel, managing director at Faros Trading in Stamford Connecticut. "This euro short covering sentiment-driven rally will likely not be sustainable over the medium-term, but may persist over the short-term.
"Over the medium-term the euro should remain under pressure with the ECB more accommodative and providing liquidity."
Indeed, Europe's debt crisis is still not under control, and economic data in the region continues to point to a recession. This should keep European Central Bank policy biased toward additional easing, a negative for the euro as it would make higher yielding currencies more attractive to investors.
Analysts said that the European Central Bank's 489-billion euro injection of three-year funds late last month eased some tensions in funding markets, helping risk assets globally.
Fifteen of the 26 traders polled by Reuters said the ECB's three-year tender has given banks easier access to unsecured funds.
"From the fiscal perspective things are looking worse than last year," said Jens Nordvig, head of G10 currency strategy at Nomura Securities in New York, noting gloomy growth forecasts across Europe.
"But because the liquidity injection is so huge, it is causing funding markets to behave better. I think it's a major success so far," he added.
FOMC, EARNINGS AHEAD
For the wider market, the Federal Reserve's two-day policy meeting starting on Tuesday will be the major event. Although no policy change is expected, the Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy.
The dollar index was down 0.6 percent on the day to 79.718. Against the yen, the dollar traded up 0.1 percent at 76.98.
The dollar hit its lowest level against the Swiss franc since Dec. 21 at 0.9247 and last traded down 0.8 percent to 0.9264.
Meanwhile, a slew of US corporate earnings reports this week should provide a gauge for the state of the world's biggest economy. Strong results could buoy risk appetite and lift growth-linked currencies but weigh on the safe-haven dollar.
Comments
Comments are closed.