Where The Euro Goes After Its 10th Birthday
All over Europe people are celebrating a birthday. Ten years ago this month the Euro was born. Ok, not so much born as created. The EuroZone is celebrating the birthday of the Euro… as they should. The Euro has been one of the biggest drivers to economic expansion in Europe over the last decade. Some might argue this fact, but I believe it’s true.
The Euro was quickly adopted by citizens and businesses in countries across Europe.
All at once, country to country travel became easy. No need to trade currency at ever stop. Business activity accelerated. No need to deal in multiple currencies and experience currency risk. Accounting got easier. Business transparency improved.
Even interest rates fell.
Within a few years, countries converting to the Euro scarcely remembered their old currencies. It was good times in the EuroZone. Unfortunately all of that has changed recently. The Euro is facing its biggest threat.
When the Euro started trading, it was valued at 1.18 Euros to the US Dollar. Now it trades for about 1.39 Euros to the Dollar. An appreciation of almost 18%. Unfortunately, the Euro’s been falling against the dollar over the last few months.
In late summer it traded as high as 1.60. As it falls, it threatens the stability of the entire EuroZone. If the Euro is devalued against the Dollar in a significant way, it could threaten its very existence.
Now, I’m not telling you anything you couldn’t have read in the Wall Street Journal or discovered through a little research of your own.
What I do want to point out is recent market action in the Euro.
The Euro has rallied since late November, gaining almost 12%.
Why the recent run-up?
Because the US Federal reserve cut interest rates to near zero. That drove investors out of the US Dollar and into the higher yielding Euro.
But here’s the issue… the Fed can’t cut rates anymore (at least I don’t see them posting a negative interest rate any time soon). But the European Central Bank can. Their interest rate is currently 2.5%. That means if they cut further, the Euro could fall against the value of the dollar.
Watching these interest rates closely is an important part of currency trading.
As the global credit crisis and recession further crush the economy, you’d expect the value of the Euro to fall as well. This is a one-two punch that could serve as a knockout-blow to the Euro.
The easy way to profit from this trend is by using a double short ETN.
Market Vectors Double Short Euro ETN (DRR) allows us to profit from the fall of the Euro. The fund should move double the daily direction of the Euro… and I’m expecting that direction to be down.
Now if an idea like that’s not a great birthday gift, I don’t know what is.
Category: Currency Trading
