Euro Falls on Mixed Results from Germany and France

The euro lost some ground against the U.S. dollar and the Japanese yen on Friday, as the two largest Eurozone economies, Germany and France, reported mixed results. At the moment, the euro lost 0.33% of its value against the U.S. dollar to trade around $1.4316. At the same time, the European currency retreated 0.17% against the yen to ¥116.44. Germany's economy continues to expand strongly as Germany's current account surplus doubles. In May, the German current account surplus stood at €6.9 billion, up from €3.1 billion a year earlier. In April, however, Germany's current account surplus was €9 billion. Germany is the Eurozone's largest economy. It is also one of the fastest growing economies in Europe. The latest results show that Germany will continue to be the locomotive driving the Eurozone recovery, which should provide some relief to investors worried about the prospects on the Eurozone periphery. The euro was hurt by weak data from France, however. According to data published today, France's budget deficit in the first five months climbed to €68.4 billion, compared to €67.9 billion in the same period a year earlier. The ministry said that the widening French budget deficit is an effect of transitory events. France, the second largest economy in the Eurozone, has also been growing strongly, though not at a pace of Germany. Problems in France will signal problems for Greece and Portugal as well, since the recovery in the Eurozone periphery will depend a lot on the strength of demand in the Eurozone center, including France. The Eurozone periphery does not need any more bad news, following Thursday's rise in interest rates. In spite of acknowledging that the Eurozone recovery is losing steam, the ECB decided to raise its interest rates to 1.5%. The ECB is worried about inflation in fast growing countries of the Eurozone center, i.e. in countries like Germany. Higher interest rates will be seen as bad news for Greece, Portugal, Ireland and Spain, as the costs of borrowing money will rise. Greece has already been excluded from the open markets. Investors are asking too high interest in order to invest in Greece's bonds, which ultimately forced the debt-ridden country to ask for another bailout from the EU and the IMF. The euro is likely to suffer heavy losses if the same scenario is repeated in Portugal and other countries on the Eurozone periphery. The ECB's logic was that preventing Germany and other fast growing countries of the Eurozone center from overheating will be, in the long run at least, good news for Greece and Portugal as well. Some analysts have called the latest ECB decision a “monetary madness”. Some analysts think the inflationary pressures are temporary. In addition, there is little evidence of inflation outside Germany. It is true that the ECB has to take into consideration the benefits of the entire Eurozone, not just the debt-ridden part. It remains to be seen, however, how pushing Portugal and Greece one step closer to bankruptcy will benefit Germany. ACTION ITEMS:

Bullish:
Traders who believe that the strong German economy will provide enough boost for the other Eurozone economies, which should push the value of the euro higher, might want to consider the following trades:

• WisdomTree Dreyfus Euro Fund EU is a long play on the euro. EU should rise if the euro appreciates.

• ProShares Ultra Euro ETF ULE is another long play on the euro. If the euro appreciates, ULE should rise more than EU.

Bearish:
Traders who believe that higher borrowing costs will turn Portugal, and possibly Ireland and Spain, into new Greece, which should send the value of the euro tumbling, may consider an alternate positions:

• Market Vectors Double Short Euro ETN DRR is a short play on the euro. DRR should rise if the euro depreciates.

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