* Euro hits 4-yr low vs dollar; Merkel says euro in danger
* German bans naked short selling of some assets
* Euro selling calms in European trade as ban news digested
* Dollar index at 14-mth high as investors shun risk
(Updates prices, adds detail)
By Jessica Mortimer
LONDON, May 19 (Reuters) - The euro hit a four-year low
against the dollar on Wednesday after Germany banned naked short
selling of some securities, sparking uncertainty and a fresh
wave of risk aversion which lifted the dollar and yen.
Germany banned on Tuesday naked short selling of euro zone
government bonds, some stocks and naked selling of credit
protection backed by sovereign debt. []
The ban triggered anxiety about whether more regulation
could follow and other countries would follow suit.
Comments by German Chancellor Angela Merkel that the euro
was "in danger" further undermined confidence in the single
currency. []
However, euro selling against the dollar cooled in Europe,
with some analysts saying the initial reaction may have been
overdone as the ban covered a limited range of transactions.
Naked short selling involves selling a financial instrument
without first borrowing it or ensuring it can be borrowed.
"The German announcement came out of the blue, without
warning, and there is major uncertainty about what this means,
whether others will follow and how they will maintain this,"
said Stuart Bennett, currency strategist at Credit Agricole.
"The backdrop is a very neurotic market which is inclined to
give any euro-related news a negative spin and we have seen
standard safe-haven buying of dollar and yen."
At 1130 GMT, the euro <EUR=> had edged back to trade up 0.2
percent at $1.2205, not far from a low of $1.2143 hit in early
Asian trade on trading platform EBS.
That move stopped ahead of key technical support at $1.2135,
the 50 percent retracement of the entire bull move in the euro
from all time lows near $0.82 to the record highs just above
$1.60.
Traders said option barriers at $1.22 were taken out and
more were lined up at $1.21, $1.20 and right down to $1.15.
Against the yen <EURJPY=R> it fell 1 percent to a two-week
low of 110.88 yen before steadying back at 111.45.
The knee-jerk reaction was based on the assumption that
selling the euro was the only way to bet against European
assets, given the limitations placed on selling bonds and some
equities.
"The decision does imply that speculators may increasingly
focus their attention on the foreign exchange market, suggesting
that euro volatility could increase as a result of this
decision," said Jane Foley, research director at Forex.com.
RISK SHUNNED
Perceived higher risk currencies came under heavy selling
pressure, with the Australian <AUD=D4> and New Zealand dollars
<NZD=D4> falling to 8-month troughs versus the U.S. dollar and
losing more than 3 percent versus the yen.
Investors sought the perceived safety of the dollar and the
low-yielding yen. The dollar hit a 14-month high of 87.458
<.DXY> against a basket of currencies, though it fell around 1
percent versus the yen <JPY=>.
The euro has fallen about 15 percent against the dollar so
far this year, hammered by concerns Europe's debt problems and
austerity measures to combat them could hamper the euro zone's
economic recovery.
"The reaction in the euro is due to all the uncertainty that
this brings - there have been fiscal problems, liquidity
problems and now there is regulation on top of that," said Niels
Christensen, currency strategist at Nordea in Copenhagen.
The euro also fell to a record low against the Swiss franc
<EURCHF=R> below 1.4000 francs before steadying just above that
level, which traders said was seen as the Swiss National Bank's
new intervention threshold.
Data showed Swiss currency reserves soared in April,
evidence of how much the SNB has had to do to prevent a sharp
franc appreciation versus the euro. []
