Investors are doubtful the euro can hold onto its gains following Wednesday's coordinated action by global central banks to protect the financial system from Europe's troubles.
Europe's common currency spiked over 1% to $1.3533 after the U.S. Federal Reserve, European Central Bank and other central banks made it easier for European banks that desperately need dollars to access the U.S. currency.
But investors said Wednesday's move didn't change their outlook on Europe and the euro, which recently traded at $1.3429. Since summer, hedge funds have dialed back their trading and moved money into liquid assets like cash instead of bets on stocks, bonds and currency exchange rates. Some funds are preparing for a possible breakup of the euro, though they deem this unlikely.
"Nothing's changed, really," said Steven Mitra, co-founder of LNG Capital, a hedge fund that specializes in Europe's bond markets. "Yes, suddenly, borrowing has become cheaper, but you're fighting leverage with leverage."
The London-based firm has cut back on trading corporate bonds in the 17 countries that use the euro since the summer—a stance Mr. Mitra said he isn't changing now.
For LNG to ramp up its trading in the euro area, Mr. Mitra said he would need to see the borrowing costs of struggling nations like Italy fall substantially. European nations continue to grapple with high borrowing costs that suggest investors are still shunning their bonds and remain skeptical about Europe's ability to stem its debt crisis.
On Wednesday, interest rates on Italy's 10-year bonds dropped, but remained above 7%. That level is widely seen as too high for Italy to refinance its massive national debt over the long term.
Sander Gerber, founder of Hudson Bay Capital Management LP, a $1 billion hedge fund firm in New York, said Wednesday's actions could even harm the financial standing of the Federal Reserve, which will effectively be lending dollars to foreign central banks more cheaply.
"This further integrates our financial system with Europe," Mr. Gerber said by email. "While it does reduce stress on European financial institutions, I believe there is real credit risk in lending to the ECB, which is being ignored by the market."
The euro's value has lately been influenced by short-term specialists who make bets on minute-by-minute or hourly ups and downs, a situation unlikely to change following Wednesday's news, investors said.
Holland Global Trading LLC made roughly 20 short-term trades Wednesday morning, with each putting in play about $500,000, said Tom Liravongsa, co-founder of the Michigan-based fund.
One trade involved figuring out when the euro's ascent Wednesday would level off, and then shorting, or betting against, the currency. Once this happened—the euro soared to $1.3533 but then dropped to around $1.3450—-he exited from his trade for a profit.
Mr. Liravongsa described the euro's long-term outlook as "not very good."
"Short-term intraday traders are the winners right now," he said."
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