Midyear market shift: Dump the dollar, buy the euro, sell gold

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

In a volatile session for financial markets as the second half of the year begins, currency traders are dumping the dollar in favor of the euro Thursday.

And the euro’s sudden strength is hammering gold, one of the big investment winners of the first half.
The euro has surged to $1.249, up nearly 2% from $1.224 on Wednesday and the European currency’s highest level since May 21.

Gold, meanwhile, slumped $39.20, or 3.1%, to $1,206.30 an ounce in New York, its lowest price since May 25.

Why the rush to euros? Traders say this is largely a technical move -- not a huge new vote of confidence in Europe’s economic outlook.

Sentiment toward the euro has been extraordinarily bearish, given the continent’s government-debt crisis this year and fear that it would fuel a full-blown financial crisis. The currency hit a four-year low of $1.192 on June 7.

But worries about the European banking system have eased in the last two days, even though many banks have continued to seek funds from the European Central Bank via a new lending program.

Logically or not, the euro began to rally Wednesday, and Thursday that turned into heavy “short covering” -- buying by traders who had been expecting the currency to go lower, not higher.

‘People are screaming, ‘Get me out of the short trade,’ ‘ said Brian Dolan, chief currency strategist at Forex.com.

The euro’s strength didn’t do any good for battered European stock markets Thursday, most of which fell between 2% and 3% on the first day of the second half.

As for the dollar, it hasn’t helped the greenback that the latest economic data confirmed that the U.S. recovery has slowed. That’s a reason to sell the dollar, even if buying the euro in its place seems an odd economic bet. And Friday brings the all-important U.S. employment report for June -- which, if weak, could trigger another round of dollar-bashing.

Still, Dolan doesn’t believe the euro rally will last. “I see it as a short-term reprieve,” he said.

Even so, the turnaround has been enough to slam gold, which has functioned in recent months as the anti-euro. As the euro rebounded Thursday, gold sank. Some investors looking for a haven lately have been picking Treasury bonds over gold, driving T-bond yields to 14-month lows. Yields eased again Thursday.

Simple profit-taking also may be driving some investors out of gold: The metal jumped 13.7% in the first half of the year and hit a record high of $1,257.20 an ounce June 18.

At some point, if the dollar keeps falling, gold could benefit by becoming the anti-dollar again.

-- Tom Petruno