Diverging Fed, ECB Policies Pressure Euro ETFs

July 22nd at 2:00pm by Tom Lydon

The euro is weakening against the U.S. dollar, with the greenback at an eight-month high against the common currency. As traders get more bearish on the euro, investors can consider inverse options to hedge EUR/USD fluctuations.

The CurrencyShares Euro Currency Trust (NYSEArca: FXE) weakened 0.4% Tuesday. FXE has declined 1.9% year-to-date.

Inverse options are strengthening. The ProShares Short Euro (NYSEArca: EUFX), which tracks the inverse, or -100%, daily performance of the U.S. dollar price of the euro, gained 0.6% Tuesday. Double inverse, or -200%, options include the ProShares UltraShort Euro (NYSEArca: EUO) and Market Vectors Double Short Euro ETN (NYSEArca: DRR), and they are up 0.8% and 0.7% Tuesday, respectively. [Bearish ETFs to Play a Weakening Euro]

Meanwhile, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) was up 0.3% Tuesday.

The U.S. dollar advanced 0.4% to 1.347 per euro Tuesday after touching $1.3459, its strongest since Nov. 21.

The euro is beginning to weaken as funding measures and monetary policies between the U.S. and Eurozone diverge, with the Federal Reserve looking to tightening its monetary policy while the European Central Bank adds unprecedented stimulus measures, reports John Detrixhe for Bloomberg.

“Where we’ve had the unique reaction is euro-dollar,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said in the article. “That’s not a data response — that is a market that’s looking to sell euro.”

Factors that have been supporting the euro’s strength are dissipating. The Fed expects to end its bond purchasing program in October, writes Richard Barley for Wall Street Journal. Meanwhile, the ECB has launched its first new long-term loan to banks in September and is set to issue another loan in December.

Moreover, the Treasuries market are also pricing in the divergence, with the spread on two-year German bunds and U.S. Treasury yields rising to around 0.45 percentage points in June and July after hovering around 0.2 and 0.3 points in the first few months of the year. Additionally, as U.S. inflation rises, the gap could expand and put more pressure on the euro currency.

CurrencyShares Euro Currency Trust

FXE_ETF

For more information on the euro currency, visit our euro category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.