The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is up 0.6% year-to-date while the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has shed nearly 2%. Some currency market observers believe more gains could be in store for the euro following national elections in France and Germany.
Germany and France are the Eurozone’s two largest economies. UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
After boosting borrowing costs once last year, the Federal Reserve is expected to raise interest rates multiple times this year. If the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback. That scenario confirms the euro has been surprisingly strong this year.
“Other forecasts see even more strength. Societe Generale expects the euro to rise from $1.07 in June to $1.11 in December,” reports CNBC. “The estimates contradict analysts’ previous forecasts for euro parity with the U.S. dollar, or a one-to-one relationship. Many traders have been on edge about whether growing populist sentiment can keep the EU together past key elections in France and Germany this year.”
Improving economic conditions and strengthening company earnings in Europe are signals that diversified exchange traded fund investors should keep in mind when looking for areas of potential growth after a multi-year run in U.S. markets leaves less opportunities at home.
The European Central Bank has been implementing a loose monetary policy that dragged yields down to record lows. Consequently, dividend-paying European stocks and related exchange traded funds (ETFs) may strengthen as more investors turn to riskier assets.
The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.
“On the economic front, the real GDP for the European Union grew 1.9 percent last year, according to eurostat. Many analysts also expect that later this year the European Central Bank will begin tapering, or reducing its stimulative quantitative easing program, due to the improving economy,” according to CNBC.
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