Euro Shorts

Boldly Betting Where No One Has Bet Before

Justice. Law scales on table. Symbol of justice
Weighing up the euro against the dollar has brought many profits to hedge funds.
  • Why it matters

    Why it matters

    Betting against the euro can be a highly profitable business, or a dangerous gamble if you get it wrong.

  • Facts


    • Large investors have entered into more than 220,000 contracts, worth a total of €28.3 billion ($30.5 billion), on the euro falling against the dollar.
    • Some hedge funds gained up to 10 percent within two months at the beginning of 2015 by speculating against the common currency.
    • Expert opinion varies on whether the euro has already reached its lowest point against the dollar. Predictions range from the euro declining to $0.85 by the end of next year to a slight increase in value.
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Anyone planning to visit Europe from the United States this year will find they can afford a much better hotel than they bargained for. A euro is now worth only about $1.08, and this is probably not the end of the European currency’s downward rally – or at least it isn’t according to the waves of speculators in the foreign currency market these days.

Large investors are betting more heavily against the euro than ever before since the common currency, now used by 19 countries ranging from Ireland to Latvia, was first introduced more than 15 years ago. It’s a practice called shorting, and it’s a dangerous game to play if you get it wrong.

For investors, this is a sign of confidence that the downward trend that began last April – when it was still valued close to $1.40 – will continue over the coming months and even years.

Still, some currency experts are already warning that pessimism over the euro might be exaggerated. Could the euro’s decline already be over?

“The reaction patterns in the foreign currency market are very transparent at the moment, as long as you don't examine them to see if they make economic sense.”

Analysts' Report, DZ Bank

Until now, betting on a falling euro has been good business for many hedge funds, especially so-called global macro funds. Many were well positioned at the beginning of the year, according to Lyxor Asset Management, a subsidiary of Société Générale, a major French bank. According to Lyxor, bets on foreign currency represented the biggest contribution to profits in the first quarter.

There are hardly any publically-available figures on individual funds. However, it was recently revealed that a few major players in the industry gained up to 10 percent within two months by speculating against the common currency. Bridgewater, the world’s largest hedge fund, was one of the players that did particularly well. Its fund, Pure Alpha, achieved a return of about 7 percent, the best start to a new year in a long time.

Now many speculators are betting that the trend will continue. According to recent data from the U.S. Commodities Futures Trading Commission (CFTC), large investors, especially hedge funds, have entered into more than 220,000 contracts on the euro falling against the dollar. There is a lot of money at stake, with the contracts worth a total of €28.3 billion, or $30.5 billion.

The data provide only a small glimpse into the foreign currency market, in which trillions are moved around every day. They represent merely a snapshot from the end of the previous month. But even at the height of the euro crisis in 2009 and 2010, it seems the euro bears did not place as many bets on their convictions as they have done today.

And for good reason, at least at first glance. Analysts mainly attribute the devaluation to the different economic situations in Europe and the United States – and, therefore, to the future path of monetary policy.

Mario Draghi, president of the European Central Bank, is pumping billions into the markets with bond purchases. Even if a quicker-than-expected recovery in Europe might lead Mr. Draghi to rethink his bond-buying plans, it is clear he intends to keep interest rates at their record low of near 0 percent for a long while still. The U.S. Federal Reserve by contrast is widely expected to raise interest rates some time this year for the first time since the 2008 global financial crisis.

Minutes of the Fed’s last meeting, released Wednesday, suggested a number of members would like to see an increase as early as June. That would strengthen the U.S. dollar and further weaken the euro.


Pessimists Reign Supreme-01


The math seems easy enough: No matter what happens, the euro seems bound to fall.

“The reaction patterns in the foreign currency market are very transparent at the moment, at least as long as you don’t examine them to see if they make economic sense,” read an analysts’ report from Germany’s DZ Bank.

Others point to pitfalls. The euro has already declined significantly – by about 15 percent in the last two quarters. And in light of lackluster economic figures coming from the United States, including a disappointing employment report last week, it remains unclear when the Fed will actually start raising interest rates.

This is why foreign currency experts at Britain’s HSBC bank have taken a more critical view of the dollar’s rally. They feel reminded of the boom in equities around the turn of the millennium – the one that turned into a bubble.

HSBC strategist Stacy Williams calls it a “one-way street mentality.” Investors are buying dollars, not because the fundamental data have changed, but merely because they believe the rally will continue. Ms. Williams and her colleagues are therefore going against the grain, and believe the euro could increase in value to $1.10 by the end of next year.

But opinion is very much divided. Deutsche Bank has predicted the euro is likely to reach parity – that is, be worth only one dollar – by the end of 2017 at the latest. Experts with U.S. investment bank Goldman Sachs are even more pessimistic. They believe that a euro will be worth only $0.85 by the end of next year.

Experts with major British bank Standard Chartered agree. Although a few market observers are now suggesting the dollar rally is over, “we are of a completely different opinion.” The dollar rally isn’t over, they say, but in fact is only beginning. The Fed’s pending rate hikes, whenever they may finally come, mean the greenback’s upward trend will remain intact.

If they are right, hedge funds will make a lot of money. And vacationing in Europe? It’s set to get even cheaper.


Michael Brächer and Elisabeth Atzler cover stocks, bonds, currencies and the people that invest in them for Handelsblatt in Frankfurt. To contact the authors: and 

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