FOREX-Euro rises as speculators unwind short positions, dragging sterling higher

* Australian dollar rises on U.S.-China trade optimism
* Yuan falls on speculation cbank may lower cash
requirements
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Olga Cotaga
LONDON, Dec 27 (Reuters) - The euro strengthened on Friday,
pushing the dollar lower and the pound higher, as speculators
unwound their short positions before the end of the year, with
thin liquidity during the holiday season amplifying moves.
Bleak European economic data meant hedge funds bet on an
even weaker euro during 2019, but the battered currency
EUR=EBS rose on Friday to an eight day high of $1.1142.
"What I'm seeing here, it's mainly some euro strength," said
Ulrich Leuchtmann, an analyst at Commerzbank.
"This very negative euro sentiment has prevailed over 2019
and has run out of steam ... coming to this period of low
liquidity, more people are more inclined to remove those short
positions," Leuchtmann said.
This short-time trend is likely to continue next week too as
the end of the decade approaches, he added.
"A lot of specs (speculators) might consider if it's wise to
keep these (short) positions over the period."
In the week to Dec. 17, leveraged funds trimmed their short
euro positions to $9.16 billion, further away from the 2019 high
of $14.84 billion.
However, the upheaval in the euro may be limited by the
large number of options expiring at $1.1155-$1.1160.
Euro strength took the pound to a one-week high of $1.3075
GBP=D3 . Sterling gained some ground against the euro too,
rising to a four-day high of 85.17 pence EURGBP=D3 .
The rise in sterling was helped by European Commission
President Ursula von der Leyen saying the European Union may
need to extend the deadline for talks about a new trade
relationship with Britain. Against the safe-haven Japanese yen, the dollar showed some
weakness as well, falling 0.2% to 109.48 yen JPY=EBS . However,
the greenback was not far off the six-month high of 109.73 yen
it reached at the beginning of this month.
The optimism around prospects for a Phase 1 Sino-U.S. trade
deal reduced demand for safe-haven currencies such as the yen,
but with global currency markets in holiday mood trading was
mostly subdued.
The trade-sensitive Aussie dollar AUD=D3 firmed to as high
as $0.6958 against its U.S. counterpart, a five-month high.
Beijing said on Wednesday it was in close touch with
Washington on a trade deal signing ceremony, a day after U.S.
President Donald Trump said he and Chinese President Xi Jinping
would have a ceremony to sign a deal. "The overnight gains in the dollar were partly erased by
dipping Treasury yields after the seven-year note auction,
U.S.-China trade optimism has put a solid floor under the
dollar," said Toshinobu Chiba, chief portfolio manager for fixed
income at Nissay Asset Management.
"In any case, I don't expect any large moves either way in
markets today as trading remains subdued due to the holiday
week."
Elsewhere, China's yuan inched lower against the dollar in
offshore trade to 6.9969 yuan per dollar CNH=EBS , pressured by
corporate demand for dollars and speculation of a possible cut
to bank reserve requirements ahead of the new year.
Markets debated whether the central bank would lower the
cash banks must hold as reserves any time soon after Premier Li
Keqiang said earlier this week the government would consider
rolling out more measures. CNY/