Euro Edges Higher against U.S. Dollar on Falling Unemployment in Germany

The euro edged higher against the U.S. dollar on Thursday as Germany's economy continued to show signs of strength. At the moment, the euro rose 0.08% against the U.S. dollar to trade around $1.4381. At the same time, the Japanese yen proved too strong for the euro as the European currency retreated 0.3% to stand around ¥111.71. The euro was supported by more good news from Germany. According to the Federal Labor Office, the number of unemployed people in July fell by 11,000, slightly below 13,000 expected by most analysts. However, German unemployment rate is still at 7%, its lowest level since the unification. Germany is the Eurozone's largest and most influential member. Recently, its economy has started to outperform its Eurozone rivals. As a result, if the Eurozone economy is to recover, a lot of it will depend on the power of the German locomotive. The latest data should please most analysts as there are few signs that Germany's recovery is starting to cool down. As one might expect, a completely different picture emerges on the Eurozone periphery as Spanish retail sales fell for the 12th consecutive month. According to the statistical office INE, Spanish retail sales were 7.4% lower in June than a year ago, a further deterioration from -5.9 recorded in May. Spain is the fourth largest Eurozone economy. It is also one of the most troubled ones. A rise in borrowing costs for Spain has forced the Europeans to take decisive action last Thursday, when a plan was outlined to resolve the debt crisis in the Eurozone periphery. The Europeans were already forced to bail out Greece, Portugal and Ireland. However, Spain's economy is twice the size of all bailed out countries combined. Spain might be too big to fail, but it also might be too big to bail out. The euro's recent run against the greenback was halted as investors became more worried that last week's plan is not enough to restore financial stability in the Eurozone. Credit rating agencies are on a warpath once more, with Moody's cutting its credit rating on Cyprus from A2 to Baa1, citing the country's exposure to Greece, while S&P cut Greece's rating once more from CCC to CC. Traders will be worried that a new frontline is about to be opened in Cyprus. The Europeans have tried to prevent the Greek crisis to spread to other member countries, yet their efforts were futile, it seems. The euro's fall against the greenback would have been much steeper if the U.S. is not fighting its own civil debt war. The two sides are still not able to reach an agreement and the clock is ticking relentlessly. John Boehner plan is under fire not only from President Obama but also from his Republican lawmakers aligned with the Tea Party movement. The movement is demanding a no compromise policy, which is likely to push the world's top economic superpower into its first default. In addition, the Boehner plan will not pass the Senate vote as Democrats and Independents have signed a letter to Boehner assuring him they will kill his proposal as soon as it reaches the Senate. Harry Reid, the leader of Democrats in the Senate, has been trying to persuade Republicans to back his own deficit-cutting plan. However, his efforts have produced little results as well. According to most projections, the U.S. will not be able to pay all of its bills by Tuesday, August 2. It looks like the U.S. political elites are heading for a very long working weekend. At stake is not just the health of the U.S. economy, but the world economy as well. The U.S. government bonds have been considered the backbone of the world's financial system, since they were perceived as the safest investment. In case of a default, the U.S. is most likely to lose its triple-A rating and its bonds will no longer be considered the safest investment, which could start a panic among traders. ACTION ITEMS:

Bullish:
Traders who believe that the Eurozone has the means and the determination to resolve the debt crisis on its periphery, which should provide a lot of tailwind for the euro, might want to consider the following trades:

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

• Market Vectors Double Long Euro ETN URR is another long play on the euro. However, URR should rise more than EU if the euro appreciates.

Bearish:
Traders who believe that there are simply too many battlefields for the Eurozone to survive intact may consider an alternate positions:

• ETFS Short Euro Long US Dollar ETC ETF (SEUR) is a short play on the euro. SEUR may rise if the euro depreciates.

• ProShares UltraShort Euro ETF EUO is another short play on the euro. However, EUO should rise more than SEUR if the euro depreciates.

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