The European economies are in a bit of "good news/bad news" situation, and exchange traded funds (ETFs) that track their currencies could be feeling the effects while the region weighs its options.

On the one hand, the European economy is doing very well. Rising prices for oil and other commodities have equaled higher headline inflation and the consumer price index (CPI) is expected to continue to rise in the next six months, BusinessWeek reports. But on the flip side is that the rising exchange rates of the euro and British pound sterling against the U.S. dollar so far hint that Europe is going to be the hardest hit by our slowing economy and the rebalancing of our trade deficit.

The conundrum has put Europe’s central banks in a bit of a pickle and all eyes are on them to see what they’ll do. BusinessWeek predicts that both the ECB and the Federal Reserve will cut interest rates at least once, in the second half of 2008. They also expect that the U.S. dollar will stabilize by that time.

Keep a close watch on the euro funds. It could be an interesting year around the corner.

  • CurrencyShares Euro Trust (FXE) up 15.5% year-to-date
  • iPath EUR/USD Exchange Rate ETN (ERO) up 9.2% for past 3-months

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

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.