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Euro extends gains on dollar

By Julianne Pepitone, staff reporter

NEW YORK (CNNMoney.com) -- The euro pared back earlier losses against the dollar Wednesday, after Germany said it would ban short selling on some European bank shares and the zone's government bonds.

What prices are doing: The euro rose 1.42% on the dollar to $1.2385 Wednesday, after the European currency touched a new four-year low versus the dollar the day before.


The dollar fell 0.52% versus the British pound to $1.4412. It was down 0.9% against the Japanese yen at ¥91.52.

The dollar is up 8% against the euro over the month, as the shared currency has taken a hit on debt concerns.

What's moving the market: Late Tuesday, Germany's financial regulator announced a ban on so-called naked short sales of debt securities issued by euro zone countries as well as the country's ten leading financial companies.

The restrictions will apply until March 31, 2011. The announcement initially drove the euro down against the dollar, but the euro gained later after investors realized European leaders are serious about stabilizing the currency, said Boris Schlossberg, director of currency research at GFT Forex.

"By taking the speculative shorts out of the market, they've naturally lowered the cost of credit in the market right now," Schlossberg said. "That has calmed the markets down."

In short selling, traders bet the value of an investment will fall. Traditional short sellers borrow the security with the aim of selling it, and then they buy it back at a lower price hoping to pocket the difference.

In a "naked" short sale, however, investors short the investment without actually borrowing the shares or bonds. That makes it easier to drive down the asset's value. To top of page

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