The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is down 12.4% year-to-date, but the really bad news is the exchange traded fund has limited prospects for near-term upside, particularly against the backdrop of diverging central bank policies between the Federal Reserve and the European Central Bank.
Currency traders who are looking to profit off any potential weakness in the EUR ahead can utilize inverse euro-currency ETF options. For example, the ProShares Short Euro (NYSEArca: EUFX) provides 100% of the inverse or opposite return on the U.S. dollar price of the euro. The ProShares UltraShort Euro (NYSEArca: EUO) provides 200% of the inverse return of the U.S. dollar price of the euro. Lastly, the Market Vectors Double Short Euro ETN (NYSEArca: DRR) also provides a -200% exposure to the euro.
Dollar ETFs have been rallying on speculation the Federal Reserve would hike interest rates from the near-zero levels. Fed Chair Janet Yellen has stated that December would be a “live possibility” for an interest rate hike if the U.S. economy continues to strengthen, and the strong jobs number help support the Fed timeline. The tighter monetary policy would diminish the supply of U.S. dollars floating around in the economy and help the greenback appreciate against foreign currencies. [Dollar ETFs Could Soar Well After Fed Liftoff]
Meanwhile, the European Central Bank is more likely to expand quantitative easing to bolster growth. Some observers expect the ECB to take further action after the terror attacks, which may weighed on the economic outlook.
“According to Todd Gordon of TradingAnalysis.com, as uncertainty over the state of the euro zone’s economy continues to rise, so does the possibility of more stimulus. Which, coupled with what could be the first U.S. interest rate hike in more than nine years, will point to a lower euro. ‘The divergent monetary policy will lead to U.S. dollar strength and euro weakness,’ he said,” reports CNBC.