Can shorting and instrument drive up its price?

As i understand it; when you short an instrument, you 'borrow' it and sell at market for the same price.

If we take commodoties as an example, if i wanted to short 200 ounces of gold, i would borrow the gold and sell it for cash. When the price drops i would buy gold at a cheaper price and return it to the kind fellow i borrowed it from.

Technically, this should have no impact on the market at the point of transaction, but i wonder if demand to borrow, if it is extreme, can drive up prices.

Is this what we see when there is a 'false break' or 'exhaustion rally'; ie a strong lunge in one direction, stall and then reverse.

No, this is not what you see.

This is a microstructure question. For the long answer, read this book: http://www.amazon.com/dp/0195144708

Currencies are a different animal, because the value of any given currency "floats". Its value is relative to the currency you are compariing it to. Thus currency PAIRS are quoted with a given price.

Each Currency Pair has a Base and a Cross currency and are listed in that order...example: EUR/USD = EUR/base & USD/cross. The price quoted shows how much of the cross currency it takes to equal 1 unit of the base currency. EUR/USD 1.3522 means 1 EUR = 1.3522 USD.

When you "short" a currency pair you are really BUYing the cross currency and SELLing the base currency. Exchanging one for the other. In the example of the EUR/USD: going short really means you are BUYing the USD and SELLing the EUR. Thus you are not borrowing anything (except the leverage from your broker).

As more and more buy USD and sell EUR, the price continues to fall as strength of the cross currency (in this case the USD) grows compared to the base currencey (EUR).

Is that clear as mud?

Yes, the point about what's really happening when you "short" a currency is valid.

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