December 27, 2019 / 9:50 AM / 8 months ago

FOREX-Euro rises as speculators unwind short positions, dragging sterling higher

* Australian dollar rises on U.S.-China trade optimism

* Yuan falls on speculation cbank may lower cash requirements

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Olga Cotaga

LONDON, Dec 27 (Reuters) - The euro strengthened on Friday, pushing the dollar lower and the pound higher, as speculators unwound their short positions before the end of the year, with thin liquidity during the holiday season amplifying moves.

Bleak European economic data meant hedge funds bet on an even weaker euro during 2019, but the battered currency rose on Friday to an eight day high of $1.1142.

"What I'm seeing here, it's mainly some euro strength," said Ulrich Leuchtmann, an analyst at Commerzbank.

"This very negative euro sentiment has prevailed over 2019 and has run out of steam ... coming to this period of low liquidity, more people are more inclined to remove those short positions," Leuchtmann said.

This short-time trend is likely to continue next week too as the end of the decade approaches, he added.

"A lot of specs (speculators) might consider if it's wise to keep these (short) positions over the period."

In the week to Dec. 17, leveraged funds trimmed their short euro positions to $9.16 billion, further away from the 2019 high of $14.84 billion.

However, the upheaval in the euro may be limited by the large number of options expiring at $1.1155-$1.1160.

Euro strength took the pound to a one-week high of $1.3075 . Sterling gained some ground against the euro too, rising to a four-day high of 85.17 pence.

The rise in sterling was helped by European Commission President Ursula von der Leyen saying the European Union may need to extend the deadline for talks about a new trade relationship with Britain.

Against the safe-haven Japanese yen, the dollar showed some weakness as well, falling 0.2% to 109.48 yen. However, the greenback was not far off the six-month high of 109.73 yen it reached at the beginning of this month.

The optimism around prospects for a Phase 1 Sino-U.S. trade deal reduced demand for safe-haven currencies such as the yen, but with global currency markets in holiday mood trading was mostly subdued.

The trade-sensitive Aussie dollar firmed to as high as $0.6958 against its U.S. counterpart, a five-month high.

Beijing said on Wednesday it was in close touch with Washington on a trade deal signing ceremony, a day after U.S. President Donald Trump said he and Chinese President Xi Jinping would have a ceremony to sign a deal.

"The overnight gains in the dollar were partly erased by dipping Treasury yields after the seven-year note auction, U.S.-China trade optimism has put a solid floor under the dollar," said Toshinobu Chiba, chief portfolio manager for fixed income at Nissay Asset Management.

"In any case, I don't expect any large moves either way in markets today as trading remains subdued due to the holiday week."

Elsewhere, China's yuan inched lower against the dollar in offshore trade to 6.9969 yuan per dollar, pressured by corporate demand for dollars and speculation of a possible cut to bank reserve requirements ahead of the new year.

Markets debated whether the central bank would lower the cash banks must hold as reserves any time soon after Premier Li Keqiang said earlier this week the government would consider rolling out more measures. (Reporting by Olga Cotaga; Additional reporting by Tomo Uetake in Sydney; Editing by Mark Potter)

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