How to play a rising euro

Currencies are complex. Good or bad economic news can quickly send a currency moving up or down, so traders need a certain amount of political foresight. But how do you turn that into financial gain? By betting on currency pairs. Tim Bennett explains.

Despite the cucumber spat that broke out between Spain and Germany this week (over claims the Spanish have been exporting vegetables riddled with E.coli), the euro has been rising recently. It is now at a three-week high against the US dollar. But why and how can a spread better play any further gain?

Currencies are complex in that they are bellwethers for their respective economies. So, any piece of news that affects the US can affect the US dollar. And, because they always trade in pairs, a poor piece of US news can cause, say, the euro to strengthen against the dollar even if nothing much has altered in the eurozone. So, currency traders need to hone in on a particular pair and watch for anything that could affect either side of it and hence the relevant exchange rate.

One of the most popular currency pairs is the euro against the US dollar or EUR/USD. That's because it offers a trade on the prospects of two of the world's largest trading zones.

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Betting is fairly straightforward:you always bet on the currency on the left of the quote here the euro. If you think it will strengthen perhaps because you have faith in Europe's policymakers to find more money to stabilise Greece you buy the pair. Equally if you think the latest Greek rescue plan will fail, or that recent poor US economic data will improve, you could sell the pair (that's what makes currencies different to, say, shares where you can bet on one company, or index, in isolation).

Because the EUR/USD pair is popular, spreads tend to be tight with brokers which keeps bet costs low. Note that you usually bet on the last digit of the quote, so if the price is $1.4414, you decide how much you want to bet on every $0.0001 movement in the rate. Always check this with your broker first.

And budding currency betters beware exchange rates can be volatile (especially if you start betting away from the major pairs) so ask your broker for a stop loss to limit any fallout from betting the wrong way.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.