Hedge Funds Shorting the Euro: Deja Vu All Over AgainVW Staff
Markets in the world today are still reeling from what was one of the worst chapters in the eurozone history. The huge levels of debt that beguile Greece and a number of other countries in Europe mean that euro, once a stable currency, will continue on its downward trend. It is this state that has led to shorting of the euro and weakening of world markets.
Some of the major players who are shorting this former great currency are hedge funds. However, in order to understand how they work, a person needs to know what shorting entails. Short selling in finance is a process through which investors purchase shares, and then sell them on the basis that their prices will fall, and then later on, they can buy them again, but at a much lower price.
Today, hedge funds have amassed a short worth €20 billion and this has been achieved by selling euro against the dollar. In fact, this has been the largest amount to have been amassed since the euro was started in 1999.
The main driving force of shorting euro has been the fear that Greece would default on its debt. In fact, as the eurozone tries to deal with increasing depression in the various economies of different countries, it is projected that there will be more turbulence for the euro in the coming future.
However, there have been voices that have argued that euro shorting ought to be stopped. This move has been met by a lot resistance with experts and financial officers arguing that this would be a short term fix, which can actually make markets less stable.
A couple of chief executive officers have even come out saying that bans on short selling can increase market volatility and cause markets to fall. They argue that short selling increases greater price discovery, helps hedging, improves liquidity of the market, and also helps to reduce market shakes.
Apart from these, if a ban is placed at one market, players can simply move to another market where such ban does not exist and continue their activity. Nonetheless, a couple of European nations have banned short selling in their stock exchange in a bid to stabilize their markets.
Euro which had been one of the strongest currencies in the world at some point is however not predicted to follow the way of the British pound. The British pound in 1992 crashed, although it had been the strongest currency in the world for the longest time ever.
Today, the biggest fear in the world market is that euro will collapse entirely. This is a scary scenario because if this happens, the world markets will be affected deeply. In addition, countries with debts to financial institutions may take down these firms as well. It is the reason why a large number of firms are engaged in short selling. This is simply because these firms are trying to make money which will be borrowed by the same eurozone countries.