The record number of speculators shorting the euro were feeling the pain on Tuesday as exchange traded funds pegged to the currency’s movements against the U.S. dollar rallied nearly 1%.
CurrencyShares Euro Trust (NYSEArca: FXE) gained 0.9% in midday trading.
“Hedge funds increased their bets against the euro to a record level in the last week of 2011, increasing pressure on the embattled European common currency as it enters the most testing year of its history,” the Financial Times reported. “Many hedge funds lost money betting against the euro for much of last year, as the currency remained unexpectedly strong despite the continent’s worsening financial crisis.”
With so many traders shorting the euro, the potential exists for a “short squeeze” if the euro strengthens and investors scramble to cover. Traders who short a stock or security profit when the price declines.
“Typically when everybody and their grandmother has piled into a trade, it’s a good time to start thinking about moving in the other direction,” WSJ.com’s MarketBeat reported last month.
CurrencyShares Euro Trust lost about 3% in 2011.
The euro climbed back above the key $1.30 level on Tuesday. Traders have been keeping a close eye on the euro because U.S. stocks tended to move in lockstep with the currency last year on Europe’s debt woes.
The Dow Jones Industrial Average rallied 240 points on Tuesday.
CurrencyShares Euro Trust
Read the disclaimer; Tom Lydon is a board member of the funds for Rydex|SGI.