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Euro/Dollar Parity at Two-Year High: ETFs to Gain/Lose

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The Euro/U.S. dollar strength has been prevalent lately with the euro breaking above $1.20 for the first time in more than two years. However, the common currency could not hold onto its momentum as a European Central Bank official said the exchange rate is crucial for the region’s economic recovery.

The strength of the euro can be attributed to the key pandemic deal. After a tough negotiation, European Union leaders agreed on a massive stimulus plan in July for their coronavirus-shattered economies in one of the longest EU summits in history.

At the meeting, the leaders agreed to distribute 390 billion euros, out of total 750 billion funds, in the form of grants — down from an initial proposal made by France and Germany in May for 500 billion euros of grants. The EU agreed to repay all the new debt by 2058. Meanwhile, member states will also have to come up with plans on how the new funds will be invested (read: Bet on Europe ETFs After a Key Pandemic Deal).

Moreover, the ECB restarted QE from November 2019 and has a negative interest in place. In April, finance ministers had already approved a 540-billion-euro package of short-term fiscal stimulus. Plus, the individual governments announced their individual economic stimulus packages (read: ETFs to Gain on ECB's Coronavirus Emergency Stimulus Rollout).

Apart from the euro’s strength, the greenback’s weakness also led to greater euro/dollar parity. A super-dovish Fed has cut the greenback’s value this year. Notably, Invesco CurrencyShares Euro Currency Trust (FXE - Free Report) is up 5.6% while Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is down 3.9% so far in 2020.

Can the Rally in Euro Last?

Profit booking and technical resistance to the $1.20 mark brought the common currency down in recent trading. However, the single currency remains up more than 10% from the bottom it hit in March.

We expect the euro to remain strong ahead as more easing action from the ECB looks less likely. The central bank already has a negative rate in place. Some analysts are expecting a “further increase in asset purchases later in the year.”

Demand for the euro from foreign markets should also not be too less as “the U.S. dollar is the world's reserve currency, while the euro is effectively a competing reserve currency. USD tends to represent around 60% of major central bank FX reserves, while EUR represents closer to 20%,” as quoted on Seeking Alpha.

ETFs to Gain/Lose

If the euro keeps gaining, these ETFs should gain/lose in the near term.

Gainers

iShares MSCI Germany Small-Cap ETF (EWGS - Free Report)

Since a stronger currency is good for small-cap stocks that are domestically exposed and have lesser dependence on exports, this small-cap Germany ETF should be a gainer. The fund is up 4.4% in a month’s time.

ProShares Ultra Euro (ULE - Free Report)

ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to two times (2X) the daily performance of the price of the euro versus the U.S. dollar. The product is up 10.2% this year. Since the fund offers magnified exposure to the currency, the benefits are self-explanatory.

Losers

iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report)

A stronger euro is bad for the export-oriented Euro zone. The latest data revealed that euro-area inflation turned negative for the first time in four years. So, this U.S. dollar-hedged Euro zone ETF may feel some pressure from a euro rally.

ProShares UltraShort Euro (EUO - Free Report)

The fund seeks daily investment results, before fees and expenses, that corresponds to two times the inverse (-2X) of the daily performance of the price of the euro versus the U.S. dollar. No wonder, a strong euro is a direct negative for the fund.

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