The euro is the official currency of the Eurozone and the second largest reserve currency in the world after the US dollar. As of 2021, the currency is used in Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain, Montenegro, Andorra, Monaco, San Marino, and Vatican City.
Reasons to Sell the Euro
Selling the euro is simply a bet on the decline of the euro’s value compared to other currencies around the world. Currency values can fluctuate due to a variety of different economic and political factors. However, there are some common factors that often lead to problems for a country and its currency.
Some of the main common reasons for currency depreciation include:
- Debt and Deficits: Countries that suffer from high current account deficits and have a large amount of debt compared to GDP are often targets for currency depreciation.
- High Inflation Rates: Elevated inflation rates can diminish the value of a currency and indicate that the country’s currency might be unstable or uncontrollable.
- Interest Rates: Lower interest rates generally have a negative effect on currency value, while higher interest rates boost currency value.
- Uncertainty: Countries that do not have a plan or method to address economic issues may face a currency crisis when traders and investors lose confidence.
How to Sell the Euro Using Exchange-Traded Funds
The most straightforward way to sell the euro is in the currency markets by going short on a currency pair like EUR/USD. The three most common currencies for selling the euro are the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). The EUR/USD currency pair is the most famous trade in the world, but the Swiss franc and the Japanese yen are widely considered safe-haven currencies.
However, the leverage required in currency markets makes it difficult to maintain a long-term position. Thus, long-term international investors prefer to use exchange-traded funds that have built-in leverage and carry less risk.
The most common exchange-traded funds for selling the euro are:
- ProShares UltraShort Euro ETF (NYSE: EUO)
- Market Vectors Double Short Euro ETN (NYSE: DDR)
Investors can also short sell or buy put options against exchange-traded funds that have a long position in the euro. Similar to the currency scenario, short selling an ETF involves borrowing shares and selling them immediately with the agreement to repurchase them later (ideally at a lower price). At the same time, put options are rights to sell the ETF that become more valuable when the security’s price drops.
Here are four exchange-traded funds that have a long position in the euro:
- CurrencyShares Euro Trust (NYSE: FXE)
- WisdomTree Dreyfus Euro (NYSE: EU)
- Ultra Euro ProShares (NYSE: ULE)
- Market Vectors Double Long Euro ETN (NYSE: URR)
Risks of Short Selling
Short selling carries a high level of risk because there is unlimited potential for losses. While the downside of a currency is capped at zero, it has unlimited potential to rise, creating the possibility of infinite losses. This means you can lose more than you initially invested. Investors should keep these risks in mind when short selling the actual currency, knowing that highly leveraged ETFs are subject to compounded losses when the currency’s price increases.
Source: https://www.thebalancemoney.com/how-to-short-the-euro-1978920
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