The United States played Santa for Europe, helping the euro rebound from a horrible first week of December.

The week ending December 14 brought a solid euro rebound as the United States provided the impetus for two important moves.  On Wednesday, December 12, Federal Reserve Chairman Ben Bernanke explained at his press conference announcing the fourth round of quantitative easing (QE 4), that the federal funds rate would be kept below 25 basis points (0.25 percent) “until we see substantial improvement in the outlook for the labor market”.  He does not expect that moment to arrive until mid-2015.  The dollar declined and the euro surged on the news.  Are Currencies Sending a Key Portfolio Construction Message?

On Friday, the Department of Labor’s Bureau of Labor Statistics reported that the Consumer Price Index declined 0.3 percent in November, despite expectations for a 0.2 percent decrease.  Core CPI (excluding food and energy) increased by 0.1 percent, despite expectations for a 0.2 percent increase.  Both measures of CPI reveal that inflation is not presently a threat because – on a year-over-year basis, CPI is up 1.8 percent and core CPI is up 1.9 percent.  Both measures are below the Federal Reserve’s inflation target of 2 percent.  The news gave the euro another boost, to finish the week with a solid gain, after sinking through first week of the month.  Friday’s euro advance was also facilitated when Markit Economics reported that its Flash Eurozone PMI Composite Output Index climbed to a nine-month high of 47.3 in December from 46.5 in November.  Bullish on the Euro

The CurrencyShares Euro Trust ETF (NYSEARCA:FXE) finished Friday’s trading session by breaking above its September 14 high of 130.40 to close at 130.61.  The September 14 high had been a resistance level.  Now that the euro has closed above that point, ongoing tension concerning the budget battle in the United States could further strengthen the euro against the dollar.  At this point, the FXE chart exhibits an inverse head-and-shoulders pattern, based on its activity since October 5 (see green bar on chart).  Now that FXE has closed above the September 14 high of 130.40, we could see a further advance. (Chart courtesy of Stockcharts.com)

Currency ETF Update: 

The following is a summary of how currency indices and ETFs performed from the close on Friday, December 7 until the close on Friday, December 14:

$US Dollar Index:  -1.04%

PowerShares DB US Dollar Index Bullish Fund ETF (NYSEARCA:UUP):  -1.09%, This ETF reflects US dollar performance as indicated by the Deutsche Bank Long US Dollar Index (USDX) Futures Index (DB Long USD Futures Index).  The USDX Index invests solely in Long USDX Futures Contracts, and compares the performance of the US dollar against the Japanese Yen, the Euro, the Swiss Franc, the British Pound, the Canadian Dollar, and the Swedish Krona.

CurrencyShares Euro Trust ETF (NYSEARCA:FXE):  +1.75%, This ETF is designed to track the performance of the Euro dollar.  CurrencyShares Euro Trust ETF (NYSEARCA:FXE) is a trust denominated in Euro dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

ProShares UltraShort Euro ETF (NYSEARCA:EUO):  -3.48%, This ETF tracks the 2X inverse daily performance of the Euro dollar in US dollar prices.  The ProShares UltraShort Euro ETF (NYSEARCA:EUO) relies on the EUR/USD cross rate as determined by Reuters by 4 PM EST to determine the price of the Euro in US dollars.

CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA):  +0.71%, This ETF is designed to track the performance of the Australian dollar.  The CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA) is a trust denominated in Australian dollars, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

CurrencyShares Swiss Franc Trust ETF (NYSEARCA:FXF):  +1.74% This ETF is designed to track the performance of the Swiss Franc.  The Swiss franc is the national currency of Switzerland and Liechtenstein and the currency of the accounts of the Swiss National Bank, the central bank of Switzerland.  The Swiss franc is the sixth-most-traded currency in the world, accounting for 6.4% of global foreign exchange transactions.  The USD/Swiss franc pair is the fifth-most-traded currency pair.

CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY):  -1.29%, This ETF is designed to track the performance of the Japanese Yen.  The CurrencyShares Japanese Yen Trust ETF (NYSEARCA:FXY) is a trust denominated in Japanese Yen, and the depository bank is JP Morgan Chase Bank, N.A. London Branch.

Bottom Line: The euro got some lucky breaks during the week ending December 14 which saw the currency make a steady climb from $1.29 to almost $1.32 USD.  The ongoing budget battle in the United States could keep the euro climbing.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.