Speculators have ramped up their bets against the euro to fresh record levels as concerns over contagion from the Greek debt crisis threaten the very existence of the single currency.
Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators increased their short positions in the euro to a record 103,400 contracts, or $16.8bn in the week ending May 4.
This meant speculators have placed an additional 48,000 contracts of bets against the euro over the past three weeks.
This left short positions in the euro outnumbering long positions by a ratio of four to one, highlighting the negative sentiment towards the single currency.
“The market is extremely one-sided, which increases the odds of a round of short-covering,” said Camilla Sutton at Scotia Capital. “However, developments to date leave us unable to to find a reason to buy the euro.”
Bets against the euro were likely to have been increased, given the sharp sell-off in the euro since May 4.
As worries over Greece and the finances of other countries on the periphery of the of the eurozone, such as Portugal and Spain, heightened, the euro dropped to a 14-month low of $1.2520 on May 7.
Indeed, over the last week, the euro fell 5 per cent against the dollar. This was the single currency’s weakest performance since October 2008, when haven demand for the US currency soared in the wake of the collapse of Lehman Brothers at the height of the financial crisis.
Analysts said the euro may find some relief from the expected establishment by the European Union on Sunday of a multibillion-euro stabilisation fund to protect the eurozone’s most vulnerable countries.
But Mansoor Mohi-uddin at UBS said with the spread of yields on Greek and Portuguese government bonds rising to record levels over their German counterparts, investors will need more assurance that European policymakers can get ahead of the market turmoil.
“Just as counterparties were wary of dealing with other banks while losses from US subprime bonds were unknown in 2007 and 2008, the same is again affecting interbank lending markets now as investors fear their counterparties may be heavily exposed to to Greek or Portuguese government bonds,” he said.
Analysts said there were a number of additional steps that policymakers could undertake to soothe investors’ nerves.
First, the European Central Bank could restart its auctions of unlimited one-year euro liquidity. Second, the ECB and the Federal Reserve could reopen their dollar swap lines so European banks could access dollars through the ECB again. Third, the ECB could buy eurozone government debt, effectively undertaking quantitative easing.
Mr Mohi-uddin said he doubted that the ECB would intervene in the currency markets, however, since declines in the euro would help the eurozone economy become more competitive again.
“These measures may cause a relief rally in the euro if announced in the week ahead - as should the EU stabilisation fund to be announced before Monday,” he said.
“But the risk that Greece is unable to follow through on the austerity measures agreed with the International Monetary Fund and the EU - and thus needs to restructure its debts - will continue to weigh on the euro this year.”
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