Euro’s Decline Leads to a Potential Short Squeeze

As Europe struggles with a debt crisis and spending cuts, the Euro has declined 10% against the dollar since December.  However, the run may be over, at least temporarily, and a short squeeze could be the result.

(click to expand)

The WSJ is reporting that the Justice Department has launched an investigation into whether hedge funds might have banded together to drive down the value of the euro.  One result is that the price of credit default swaps for Greece, Portugual and Spain fell yesterday —  a possible sign of a coming short squeeze on traders with bearish positions on Europe and the Euro.

An ETN that has enjoyed a nice run in concert with the Euro’s decline is the Market Vectors Double Short ETN (DRR).  Up over 22% since the beginning of December, the exchange traded note tracks an index that is two times leveraged, meaning that for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

Market Vectors Currency Exchange-Traded Notes are senior, unsecured debt securities issued by Morgan Stanley.

For more ETF investing choices, see the ETF Directory for a complete list of Currency ETFs.