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Dollar falls after steps taken to bolster euro

Germany bans “naked” short selling of eurozone government bonds


 

The loonie fell as much as 1.36 cents Wednesday morning after Germany implemented a ban on so-called “naked” short selling of eurozone government bonds. It later recovered some ground after the markets opened, trading at about 95.54 cents (U.S.), down about a cent from a day earlier. Germany’s decision to ban “naked” short selling was designed to prevent big market sell-offs amid the Greek debt crisis, but traders are questioning the wisdom of the move, which some are interpreting as an act of desperation. Short selling occurs when traders borrow financial instruments and then sell them in anticipation of a price decline. They make money off the transaction through an agreement to buy back the instruments (at a lower price), and then return them to the lender at a later date, pocketing the difference. By contrast, “naked” short selling happens when traders take advantage of loopholes in the financial markets to short instruments they haven’t actually borrowed.

Globe and Mail


 
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Dollar falls after steps taken to bolster euro

  1. By contrast, “naked” short selling happens when traders take advantage of loopholes in the financial markets to short instruments they haven't actually borrowed.

    I guess I understand less about short-selling than I thought. How can you borrow something you're shorting? I thought shorting was a promise to buy something in the future to sell immediately to someone else, at a sale price agreed upon today? You are betting on the price going down, and your buyer is betting on the reverse. You can't short anything without a buyer agreeing today to your price. What makes it naked? What's the loophole?

    And why would a government placing restrictions on what one might do with one's Euros actually increase the value of those Euros? What am I missing?

  2. Thanks, Craig.

    So Germany would have us believe evil naked short sellers are responsible for the Euro's decline? Seems to me Europe's governments are doing a bang-up job all by themselves.

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