3 Ways to Play a Dying Euro

Half a world away, one of the oldest civilizations on the planet is tearing itself apart over its government's sovereign debt. The consequences of that unrest may not only prove severe but also come home to roost right where you live. If you take the right steps now, though, you may be able to turn the Greek crisis to your advantage.

Greeced lightning
Unless you haven't looked at the stock market for the past few days, you've already seen plenty of impact from what's going on in Greece. Increasingly, many are seeing an eventual default on its government debt as inevitable, as the nation's prime minister has thus far failed to get enough spending cuts through the Greek Parliament to meet the conditions of European Union and IMF bailouts. Without that money, Greece could be unable to pay its debts as soon as next month.

One reason the Greek situation is so crucial is that it threatens to start a cascade of economic problems across the continent. Ratings agencies are looking closely at French banks that have high exposure to Greek debt and other investments, and although U.S. banks don't have a lot of money tied up in Greece, collateral effects could eventually hit them as well. It may be unlikely, but there's a possibility that the situation could at some point grow to destabilize the entire eurozone, throwing the basis of the common currency into question.

How to defend your portfolio
We can already see the damage that the Greek situation has caused throughout the financial markets:

  • The euro fell sharply against the U.S. dollar yesterday.
  • The price of oil and other economically sensitive commodities fell as well, although gold and silver held their ground.
  • Stocks across Europe and in the U.S. dropped substantially.

So if you think the Greek crisis will escalate and spread to larger economies like Spain, this may be just a taste of things to come. Here are some strategies to consider implementing to protect your assets.

1. Bet on a dollar rebound.
After plunging for about the last year, the dollar has shown signs of strength lately, rising almost 2% against the euro just yesterday. Until the European situation gets resolved, that trend could continue.

Currency ETFs ProShares UltraShort Euro and PowerShares DB US Dollar Bullish offer a direct way to bet on a rising dollar against the euro. But an alternative is to choose European companies that do a lot of business off the continent. They may take a hit in their home markets, but their dollar-denominated revenue will give them some favorable currency effects. For instance, Unilever gets more of its sales from the Americas than from Western Europe, while semiconductor maker ASML Holding (Nasdaq: ASML  ) gets the bulk of its revenue from Asia.

2. Be careful about commodities.
Commodities like oil have been riding high on geopolitical unrest and strong demand. But oil has typically moved in the opposite direction from the dollar lately. With more speculative industry players like Kodiak Oil & Gas (AMEX: KOG  ) and Brigham Exploration (Nasdaq: BEXP  ) , local issues like bad weather can have a bigger impact on stock prices than overall oil price levels. But bigger energy companies whose prices are more tied to the price of oil could see immediate hits.

Also look for second-order effects. Solar stocks LDK Solar (NYSE: LDK  ) and JA Solar (Nasdaq: JASO  ) have benefited from both high oil costs and German solar subsidies. Anything that puts the health of the German economy at risk could create problems for those stocks.

3. Be smart about stocks.
A strong dollar has implications for U.S. stocks, and not all of them are good. Companies including IBM (NYSE: IBM  ) and Nike (NYSE: NKE  ) have seen earnings pressured during periods of dollar strength in the past. Many multinational companies get a healthy portion of their sales from Europe, so a weaker euro spells smaller profits from the region. Plenty of American stocks have immense European exposure.

Another concern
Finally, keep in mind that what's hitting Europe now could turn around and face the U.S. in the future. With our own sovereign debt crisis looming within the debate over the debt ceiling, the dollar and the euro have taken turns looking less attractive than the other. Protecting yourself in the short term makes sense, but making long-term assumptions about currency markets can be the most dangerous thing you ever do.

No matter what happens in Europe, government interaction in the financial markets is becoming more prevalent. Find out about two small caps that the U.S. government thinks are too important to fail in the Fool's special free report.

Fool contributor Dan Caplinger doesn't think the euro will die completely, but he hasn't bought any lately. He also doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of IBM. Motley Fool newsletter services have recommended buying shares of Unilever and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is good around the world.


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  • Report this Comment On June 16, 2011, at 6:35 PM, gcmagone wrote:

    Here's a small Australian company that may be a good find. It is in the shale oil/gas exploration business. Has no debt. Has discovered oil in a couple of wells. Shares are cheap, about $3. Has acreage in the Eagle Ford. Just entered a joint venture with adjoining Chesakeak acreage. Bet you have never heard of it. They are Sampson Oil & Gas Limited symbol: SSN. Full disclosure, I bought 100 as a crap shoot because it's cheap and has NO DEBT.

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