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ETF Talk: Profiting from the Falling Euro

December 30, 2009
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Investors who like to profit from well-timed currency investments may want to consider betting against a weakening euro. Indeed, the U.S. dollar rallied overnight and pushed the euro down today as U.S. stocks, oil and gold dipped.

With investor interest waning in higher-yielding currencies such as the euro, the dollar is ascending. You may recall me voicing my belief in the Dec. 16 ETF Talk that the dollar had fallen below what I viewed as its true value, and that its downward trend was starting to change. Well, that reversal of the dollar’s fortunes appears to be taking hold.

One way to profit from a flagging euro is to invest in the UltraShort Euro ProShares (EUO), an exchange-traded fund (ETF) that seeks to replicate, net of expenses, twice the inverse performance of the EUR/USD daily price change. Basically, with EUO, you are betting on the dollar’s rise vs. the euro. Right now, betting against the euro is looking like a shrewd move.

The dollar hit intraday highs against the euro, yen and the Canadian dollar after the Dow Jones Industrial Average opened lower today. Reports also surfaced this morning that loans to companies in the euro zone fell in November, which put further downward pressure on the euro. The chart below shows the rise of EUO throughout December as the euro pulled back.

In my experience, currency trends often seem to last longer than they should. With the trend now working in EUO’s favor, the fund could be a place where currency investors may want to put a small percentage of their funds. I recently recommended EUO in my ETF Trader service as a short-term trade.

With equities and commodities under pressure in recent weeks, the dollar is strengthening at the expense of the euro and other currencies. With the economic recovery in Europe appearing as though it may lag behind other regions of the world, the European Central Bank could be forced to remain in neutral as other central banks look to fend off inflation in the months ahead. If that situation arises, the euro will be vulnerable to further declines.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. Remember, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me. To send your question to me, simply click here. You may see your question answered in a future ETF Talk.