The Right Way to Play the Euro Right Now

The Federal Reserve meets later this month and traders widely expect the U.S. central bank to raise interest rates for the first time in nine years. The European Central Bank (ECB) also meets this month and traders widely expect the expansion of the ECB’s quantitative easing program.

Either event should lead to more downside for the euro, but should both events come to pass, pressure on the common currency could be rapid and significant. Traders are displaying what could prove to be a telling affinity for the ProShares UltraShort Euro (NYSEArca: EUO), which provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis.

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.

“One trader on Wednesday used options to bet on a weaker euro buy purchasing a chunk of 52,000 $28 call options in the ProShares UltraShort Euro ETF (EUO) that expire in February. The ETF rises in value when the euro falls, meaning that “call buying on the ETF expresses a bearish sentiment on the euro,” noted Alison Edwards at Susquehanna Financial Group in a report on Wednesday,” reports Chris Dieterich for Barron’s.