By Oliver Biggadike – May 21, 2010 Email Share Print

Futures traders pared bets against the euro versus the dollar from a record as widening price swings prompted a reduction of euro-funded investments in higher-yielding countries such as Australia.

The number of wagers by hedge funds and other large speculators for a decline in the 16-nation currency on May 18 was 107,143 contracts more than those for a gain, down from a record 113,890 a week earlier, Commodity Futures Trading Commission data show. Volatility in major currencies rose to a seven-day high of 14.54 percent that day and later climbed to as much as 16.95 percent on May 20, a JPMorgan Chase & Co. index shows.

“Even before Tuesday, we were starting to see some increase in volatility and it’s just natural that volatility was causing people to pare down risk,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The short positions were already very extended and I suspect the patterns you’re seeing in the numbers through the Tuesday of this week probably intensified over the balance of the week.”

The euro rose 1.7 percent this week to $1.2570, the biggest five-day gain in eight months. The currency recovered after a German ban on some types of trades betting against euro-area government credit quality pushed the shared currency to a four- year low of $1.2144 on May 19.

“All the reasons to be negative on the euro a month ago are still in place,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “We’re going to go very quickly back to that strategy of buying high-yielders with good balance sheets and selling the euro.”

Interest Rate Differentials

Currencies such as the Australian dollar are known as high- yielders because benchmark borrowing costs at 4.5 percent are more than quadruple the European Central Bank’s 1 percent rate.

Each Friday the CFTC publishes aggregate numbers for long and short positions for speculators such as hedge funds and institutional investors that buy or sell futures to protect against price moves. Analysts and investors follow changes in speculators’ positions because such transactions can reflect an expectation of a change in prices. Futures are agreements to buy or sell assets at a set price and date.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net

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