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The Euro Got Stripped Naked – May 19, 2010

And the fire sale goes on! The EUR once again got sold like ice popsicles on a summer afternoon during the last several days as the debt contagion in the euro zone, particularly in Greece, worsens. Just last week, the fiber or EURUSD was trading around 1.2700. Similarly, the EURJPY was exchanging at around 118.00. Today, however, both euro pairs are down to 1.2200 and 111.50, respectively. Correct me if I’m wrong but that’s a loss of about 500 pips against the greenback and 650 pips versus the Japanese yen!

Like what I mentioned in my previous post, the once famous dollar-substitute, the euro, slid yet again against the safer USD and JPY when the biggest country in the euro zone, Germany, elected to forbid the practice of naked short selling and naked credit default swaps. What a minute! Naked? What the heck are we talking about here? Well, naked short selling is the shorting of investment instruments without borrowing them first. Here, the seller could “fail to deliver” what he sold since he is not yet in the position of the instruments. Credit default swaps, on the one hand, is a contract where the owner effectively pays periodically for a payoff in the event the loan issuer defaults. In any case, both naked or “bare” transactions allow traders to speculate on debt issues. More...

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