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Euro ETFs Primed for Short Squeeze on Record Bears

tlydon@globaltrend.com (Tom Lydon)

Record bullish sentiment on the U.S. dollar means ETFs pegged to the unloved euro would benefit from a a potential “short squeeze” in the currency if investors get any positive news on Europe’s debt crisis or further central bank intervention.

Bullish bets on the dollar among institutional investors are at record levels, Dow Jones reports.

Additionally, negative euro sentiment as measured by investors betting on a fall in the value of the currency also recently hit record levels, according to the report.

PowerShares DB US Dollar Index Bullish (UUP - News) is down more than 1% so far in June, which has provided a lift to stocks and precious metals like gold. The currency ETF’s index measures the dollar’s fluctuations against a basket of currencies.

The dollar ETF has eased back following May’s spike on Eurozone debt fears. UUP saw only five down sessions last month.

Some Wall Street currency analysts like Geoffrey Yu at UBS are saying that excessive dollar longs and euro shorts means a short squeeze in the euro could be in the cards.

A short squeeze occurs when investors betting against a currency or security are forced to buy to cover their short positions.

A stronger euro and weaker dollar could provide a boost to U.S. stocks and would signal receding anxiety over European debt and banks.

Long futures contracts on the U.S. dollar held by noncommercial speculators have been at record highs for three weeks in a row, said Chris Kimble at Kimble Charting Solutions in a note this week.

There are a “good more dollar bulls” than the 2008 and 2010 highs, he added.

In other words, being long the dollar looks to be one of the most crowded trades out there currently.

CurrencyShares Euro Trust (FXE - News) in June has rebounded from a 52-week low. The currency ETF tracks the performance of the euro versus the U.S. dollar. FXE would benefit from a short squeeze in its underlying currency, the euro.

Trading volume in the ETFs tracking the dollar and euro — UUP and FXE — has trended lower in June after last month’s action, says Paul Weisbruch at Street One Financial.

Overall in the options markets for these currency ETFs, the theme has been bullish sentiment on the dollar ETF (UUP) and bearish sentiment on the euro (FXE), he added.

Currency markets chart source: Kimble Charting Solutions

PowerShares DB US Dollar Index Bullish