Here is the "drag".
thebulliondesk.com
Central banks, hedge funds dump euro, yen and gold
Euro setback due mainly to central bank intervention threats warding off speculators
By NEIL BEHRMANN
IN LONDON
IN a rapid turnaround in markets, central banks, hedge funds and banks have been dumping the euro, yen and gold, London, New York and Swiss dealers say.
After reaching a peak of just over US$1.29, up 54 per cent from its lows just over two years ago, the euro closed the week at US$1.252. The yen has also weakened, while sterling and currencies like the Canadian and Australian dollars have also fallen sharply as US dollar bears covered their positions by buying back the greenback. Gold, which has been surging because of dollar weakness, slid from a weekly peak of US$416.50 an ounce to US$397, a drop of 5 per cent.
Copper and other metals that had soared on the basis of dollar weakness and buoyant Chinese demand, also succumbed to speculative profit-taking.
Several independent dealers who said that they could not go on record, reported that the Saudi Arabian Monetary Authority, which had been an extensive buyer of euros at between 100 cents and 115 cents had become a seller of the European currency. A London dealer added that some Asian central banks were also reducing euro positions.
Macro hedge funds, which play currency, stock, bond and commodities markets and have been vigorous dollar bears and gold bulls during the past nine months turned sellers. Dealers report that when they failed to drive the dollar down to 100 yen because of successful Bank of Japan (BOJ) support, they repurchased the dollar.
In the past week, several US and European hedge funds have been taking profits on their euro bull positions, London and New York traders report. A New York trader also detected large-scale selling of the European currency by German and Swiss banks.
Brendan Brown, London-based head of research at Tokyo-Mitsubishi International, believes the BOJ has won the battle against the dollar bears, following purchases of well over US$200 billion since the beginning of 2003. He also contends that there is a good chance that the euro has peaked. Neil MacKinnon, a director of ECU Group, London currency advisers, agrees with this view.
But economists at Standard Chartered and most currency strategists believe that the move is a short-term reprieve for the dollar, prior to renewed weakness in coming weeks and months. The key to the dollar's long-term future is when the Europeans decide to cut interest rates and the Federal Reserve raises US rates, Mr Brown says.
The main reason for the euro setback in the past week, however, is that European central bank threats of intervention have warded off currency speculators for the time being. There hasn't been any confirmation, but several independent currency sources believe that the European central banks have begun to test market players' resolve to push down the dollar.
The market has perceived relatively large sales of euros by specific European banks whenever the rate threatened to break US$1.30. The fear is that European central banks were behind the orders. The main aim has been to create uncertainty and dent upward momentum, dealers said.
The European Central Bank and other European central banks have pointedly not denied rumours that intervention has taken place. The game is to keep players second-guessing.
A few weeks ago, hedge funds vigorously cut back positions on gold. According to the US Commodity Futures Exchange Commission, the net large hedge and commodity futures fund speculative position on Comex, the New York futures exchange, fell to 7 million ounces by Feb 17 from 16 million, a fortnight earlier. Dealers report that there were more sales late last week when the dollar revived sharply. |
