Bearish on the Pound and Euro

05/20/2010 12:00 am EST

Focus: ETFS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of Short-Side Trader, says Europe’s economic and fiscal woes will continue, and that will help the dollar but hurt other currencies.

The clouds are darkening over the worlds' economies, and the fragility of the economic recovery will turn back into a recession as fiscal contraction hits Europe and the US in the coming months.

Credit markets have stabilized, but the euro has not. There's not a great deal of confidence that the [recently announced] rescue plan will actually be implemented. There is fear the European Central Bank will not be able to withdraw its liquidity measures and will we forced to print money to monetize debt—something that will put pressure on the euro and lift the dollar.

Across the pond in Britain, some stability has come with the naming of a new Prime Minister, David Cameron, and the establishment of the first coalition government since 1945.

But the British economy is very soft, and the new government promised to cut spending—which led to the Bank of England hinting that it might renew "quantitative easing" to help the economy.

"Quantitative easing" is code for printing money. It's an action that has put more pressure on the pound, now trading for several days below $1.50, as there is a growing belief that Britain will allow the pound to slide to boost competitiveness and help pull the country out of a recession.

However, it's a recession that will only grow worse as the government cuts back on borrowing and spending.

Greece will continue to be unstable as the population digs in against austerity measures, and the same will happen in Spain, Portugal and other countries that must cut back deficit spending.

As a result we'll not only stick with the CurrencyShares Euro Trust (NYSEArca: FXE) January 2011 120.00 Puts and the PowerShares DB US Dollar Index Bullish ETF (NYSEArca: UUP) September 26.00 Calls, but also with the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) September 150.00 Puts profiting from continued weakness in the pound.

(FXE closed at $123.50 Wednesday, UUP above $25, and FXB at about $143.50. Buying put options on currency ETFs is only for very risk-tolerant investors or traders who can afford to lose their investment—Editor.)

Whatever happens in the markets, the political sentiment is now toward some form of austerity, and that means a double-dip recession in Europe—perhaps even a savage recession in some European countries that will spill over to the United States. And that means the United States will slip into the second dip of the double-dip recession that I've seen coming for months.

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