How to Short the Euro

As another round of European debt bailout talks hit the news we look at just how to short the Euro in advance of farther declines. The Forex trader working in the EUR/USD pair can sell Euros and buy dollars. Thus he is “short” the Euro and “long” the dollar. However, people who are used to trading stocks may be looking for something analogous to selling a stock short in which the trader borrows shares from his broker and promptly sells them. How to short the Euro in a way similar to shorting a stock is to deal in futures or options in the Forex market. By selling a futures contract on the Euro a trader expects to be able to profitably exit his position at a later date once the currency has fallen below the futures contract value. Then he earns the contract price and pays the, then current, market price for the Euro. He can also purchase a put option on a futures contract which gives him the right but not the obligation to sell the Euro. In this case, if the Euro recovers, he only loses the price of the options premium. In the current uncertain circumstances how trade Forex on the Euro may well be to short the currency.

For those not directly engaged in trading foreign currencies there are other strategies for how to short the Euro. These involve using the Euro to buy stocks or gold or shorting an ETF that tracks the performance of the Euro. As we watch the downward direction of the Euro not all Europeans are sad to see the decline. European exporters like Siemens stand to see their products become more competitive as the Euro sinks in value. Using Euros to invest in a strong European stock could be a viable means of how to short the Euro. Shorting an ETF that tracks the Euro will be just like shorting any NYSE stock. The trader borrows from his broker and enters a sell position. He will have to buy back the ETF at a later time when, he believes, that the Euro will be cheaper. Likewise buying put options on the ETF gives the trader the option but not the obligation to sell at the contract price and buy at a lower price. Buying gold with the Euro is also a way how to short the Euro.

From the Forex trader’s viewpoint the cleaner solution for how to short the Euro is to trade the EUR/USD pair and sell Euros for dollars. Unlike tying up capital investing in European companies or dealing with the Euro through an ETF trading the Euro directly allows the trader to profit from minute by minute fluctuations in the Euro’s value. As talks about debt relief for Ireland continue the news drives the Euro up and down. A wise trader can make profitable use of these fluctuations without going through a “third party investment” such as buying stocks or gold. The trader will only need to know the factors influencing the EUR/USD pair and not have to further investigate what drives gold prices or the financials of foreign companies.