How do you short a currency?

April 28, 2014 at 10:33 pm

Answer by Dave Hughe:

There are basically 3 ways to short a currency:
1. You can sell a contract for that currency in a Futures Market.
2. You can sell an index of that currency. For example, if you believe that the US dollar is going to weaken, you can sell a US dollar index, which measures the value of the USD against a basket of currencies: U.S. Dollar Index
3. You can sell that currency against another currency in the Forex market.

In Forex all currencies are traded in pairs. Each pair’s name is an abbreviation of the names of its currencies. There are many different pairs but the main trading activity is concentrated in the following:

EUR/USD   –  Euro versus US dollar
GBP/USD   –  British Pound versus US dollar
USD/JPY    –  US dollar versus Japanese yen
USD/CHF   –  US dollar versus Swiss franc
USD/CAD  –  US dollar versus Canadian dollar
AUD/USD  –  Australian dollar versus US dollar
NZD/USD  –  New Zealand dollar versus US dollar

There are also pairs called crosses such as:
EUR/JPY    –  Euro versus Japanese yen
EUR/GBP   –  Euro versus British pound
EUR/CHF   –  Euro versus Swiss franc

The list goes on.

The price of the pair states how much the first currency is worth in the second currency denomination. For example, if the price for EUR/USD is 1.3500, this means that one Euro is currently worth US$1.35.

You are always long or short one side of the pair against the other side of that pair. When you buy the EUR/USD pair this means that you simultaneously buy the Euro and sell the USD. When you short the Euro, you basically sell the Euro and buy the USD.

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