As the U.S. dollar slid in recent months, one of the primary beneficiaries has been the euro, which had surged to the key $1.50 level relative to the dollar as worries about prolonged periods of low interest rates in the U.S. and the greenback’s future as the default reserve currency created a perfect storm around the greenback. But now the tables have turned, and the euro has been hit by a succession of negative developments that have erased months of gains in a few sessions.
Last week’s downgrade of sovereign Greek debt by Fitch Ratings has started to weigh on the euro zone currency. Citing fiscal deterioration in one of the most debt-laden European states, Fitch became the first agency to drop Greece’s rating below “A” in more than ten years. The development hammered Greek stocks and bonds, and sent the euro lower as well.
“The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece,” Fitch said in a statement. “The lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilized and then reduced over the next three to five years.”
Adding fuel the to the fire was news that Austria nationalized ailing Carinthian Hypo Alpe Adria Bank AG, the country’s sixth largest financial institution. News of the takeover sparked fears that other Austrian banks were on government “watch lists,” and the the country was on the verge of a large-scale financial crisis. Several sources have reported that the fourth-largest bank, Oesterreichische Volksbanken AG, is under close surveillance, and may be unable to make an upcoming interest payment.
Beyond these events, many European economies, including Spain and Ireland, continue to struggle, with still-rising unemployment rates and still-contracting GDP. While many economies have pulled themselves out of the most recent recession and are poised to begin growing again, the presence of several “weak links” has fueled speculation that rates will remain at record lows for the foreseeable future.
Short Euro ETFs
For investors who believe that the euro’s recent downfall is only the beginning of the troubles for the currency, there are two ETF options to profit from continued chaos and a prolonged depreciation:
- ProShares UltraShort Euro (EUO): This ETF seeks to deliver daily returns equal to 200% of the inverse of the daily performance of the U.S. dollar price of the euro. After declining steadily for several months, EUO has rallied sharply in recent days, gaining more than 7% so far in December.
- Market Vectors Double Short Euro ETN (DRR): This ETN is a senior, unsecured debt instrument linked to the Double Short Euro Index, a benchmark that will increase by 2% for every 1% weakening of the euro relative to the U.S. dollar. It is important to note that DRR is structured as an exchange-traded note (ETN) meaning that investors in this product are exposed to the credit risk of the issuing bank (Morgan Stanley in this case).
Long Euro ETF Options
For investors who think the markets have overreacted to troublesome situations in Greece and Austria, there are several ETFs that can be used to deliver a profit if the euro quickly rebounds. WisdomTree, Rydex, and iPath all offer products linked to the EUR/USD exchange rate, while ProShares and Market Vectors offer 2x leveraged products.
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Disclosure: No positions at time of writing.