Official currency of Europe’s single currency area, the euro ranks as the world’s second biggest reserve currency, after the dollar. At this point (in 2021), the currency may be found in Austria; Belgium; Cyprus; Finland; France; Germany; Greece; Ireland; Italy; Latvia and the Netherlands. The money can also be found in the United Kingdom, Montenegro; Monaco and San Marino.
Due to its relationship to interest rates, which climb when the economy does well, investors may buy the euro as a bet on the eurozone’s strengthening economy. Short-selling the euro may be a profitable strategy for investors when interest rates are decreasing and the currency is becoming less valuable. To protect their portfolios from currency risk, investors might buy or sell euro futures and options contracts.
The classic method of shorting the euro is to borrow a certain amount of euros, pledge to buy them in the future, and then exchange them for a foreign currency shortly after. After a currency exchange, the cost of acquiring euros reduces, resulting in a profit for the trader when it closes.
An international investor may short sell the euro to profit on a possible drop in its value, which will be the focus of this essay.
Euro Shorting: The Case for It
It’s a wager that the euro’s value will decline in comparison to other currencies throughout the globe. Due to a range of economic and political variables, currency values may change. Problems with a country’s currency generally stem from a few basic factors.
Among the most prevalent causes of currency devaluation are the following:
- Deficits and Debt. Devaluations often target countries with large current account deficits and high debt levels in relation to their gross domestic product (GDP).
- Inflation on the Rise. Inflationary pressures may reduce the purchasing power of a currency while also raising concerns about the stability or controllability of that country’s currency.
- Rates of Interest. For most currencies, falling interest rates lower their value, while increasing interest rates raise their value.
- Uncertainty. If a country lacks a strategy for dealing with its economic woes, it may suffer from a currency crisis.
ETFs may be used to short the Euro.
Going short on a currency pair like EUR/USD is the most apparent strategy to short the euro in the currency markets. U.S. Dollar, Japanese Yen and Swiss Franc are all popular currencies to short the euro against (CHF). Even though the EUR/USD currency combination is the most often traded, other currencies like the Swiss Franc and Japanese Yen are seen as safe havens.
It’s tough to have a long-term position in the currency markets because of the high level of leverage necessary. ETFs that have built in leverage and are less risky are better suited to foreign investors with long-term time horizons.
To short the euro, the two most popular exchange-traded funds are:
- ETF for shorting the euro (NYSE: EUO)
- Euro ETNs are double shorted by Market Vectors (NYSE: DDR)
With a long position in the euro, investors may also short sell or buy put options against ETFs. A short sale of an ETF is quite similar to a currency situation in that shares are borrowed and then sold with the understanding that they will be purchased again (ideally at a lower price). PUT OPTIONS: These rights to sell ETFs increase in value as the price of that securities falls.
Four ETFs that are long the euro may be found here:
- Exchange-Traded Equities (ETE) (NYSE: FXE)
- Dreyfus Euro WisdomTree (NYSE: EU)
- Shares of the ProShares Ultra Euro are traded on the New York Stock Exchange (NYSE: ULE)
- Euro ETNs are double long from Market Vectors (NYSE: URR)
Risks of Short Selling
Because of the almost limitless potential for loss, short selling entails a significant degree of risk. However, currencies have a theoretically endless upside that may lead to limitless losses, unlike a currency’s restricted downside. That is, you might lose more money than you put in. When shorting a currency, investors should be aware of these dangers, and they should also be aware that ultra-short ETFs suffer comparable losses when the value of the currency climbs.
- Investors may short the euro for a variety of reasons, including a bet on the currency’s collapse or a means to protect their portfolio from currency dangers.
- By borrowing a certain amount of euros and then promptly swapping them for another currency, the conventional method of shorting the euro is achieved.
- The simplest approach to short the euro is to use ETFs with built-in leverage, since currency markets demand tremendous leverage and experience.