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When investing in euros, you exchange your local currency for the European Union’s currency to benefit from the economic stability or protect yourself against fluctuations in the local currency.
Holding cash in a bank might seem to be safe. However, your money may be devoured by inflation and high-interest charges without your realization. The approach that you choose is important.
If you are in the US, euros will allow you to diversify the risk against the dollar. You can plan to make a trip to another country or speculate on economic changes between the US and Europe.
The amount of money invested in euros can range from as simple as storing physical cash to as complex as trading highly sophisticated financial products. There are various risks, costs, and tax regulations for each option.
This guide explains how to invest in euros and outlines the approach best suited to your purpose.
Quick Answer
Exposure to EUR is available to US investors in the form of spot forex trading, EUR-based funds or exchange-traded funds, multi-currency accounts, euro-denominated bonds, futures, or options.
- Spot forex is suitable for short-term speculation
- Funds or bonds are ideal for medium-term exposure
- Multi-currency accounts are appropriate for future euro spending
You must choose based on your objectives, the level of risk, and relevant regulatory provisions.
What “Investing in Euros” Actually Means
When one invests in euros, the decisions will usually be based on the currency’s appreciation against the dollar or holding euro-denominated assets.
EUR as a Currency vs. Euro-Area Assets
The ownership of the currency and that of assets priced in the currency are distinctly different.
- Direct ownership of EUR: This refers to holding cash, bank balances, or instruments to track the exchange rate directly. The increase or decrease of the EUR against your home currency is enough to make you either a profit or a loss.
- Holding assets in EUR: This involves purchasing German stocks, French bonds, or European real estate. In this case, you are taking two risks: asset performance and exchange rate fluctuations.
Return Drivers
Exchange rate fluctuations, central bank policies, and interest rate differentials affect the potential returns of euro investments.
To an American investor, the primary driver is the EURUSD exchange rate. When the euro appreciates against the dollar, then your euro investments would be worth more when converted back into USD. The key determinants of this include:
- Central Bank Policy: The actions of the European Central Bank (ECB) against the Federal Reserve.
- Interest Rate Differentials: Capital tends to move in the direction of currencies with high interest rates. When U.S. rates are significantly higher than those in the EU, the dollar tends to appreciate.
- Risk Sentiment: USD tends to be a haven, whereas the EUR tends to appreciate when the world economy is on the upgrade.
To better understand the nature of safe-haven assets during an economic downturn, our article on [Gold] can be interesting to you, as precious metals tend to be negatively correlated to fiat currencies.
Ways to Hold Exposure
Investors will select a variety of vehicles depending on whether they are speculating on a short-term price change, hedging against future costs, or diversifying a long-term portfolio.
- Speculation: Short-term speculators often utilize spot forex or derivatives to capitalize on price fluctuations, anticipating that the euro will appreciate in the near future.
- Hedging: Companies or individuals planning to spend in Europe (e.g., on tuition or property) in the future hold some euros to maintain their purchasing power and avoid being affected by exchange rate appreciation.
- Diversification: Long-term investors can include euro-denominated bonds or stocks in their portfolio to minimize dependence on the US economy.
Ways to Get EUR Exposure
Direct forex trading, exchange-traded funds, foreign currency accounts, or fixed-income instruments such as bonds can offer exposure to investors.
Trade EUR via Spot Forex
Spot forex enables traders to buy or sell the euro against other currencies, such as the dollar, with leverage to maximize the potential for a favorable outcome.
The euro is most usually traded in the EURUSD pair and is the most liquid financial instrument globally. You are also allowed to trade in crosses as EURJPY (Euro vs. Japanese Yen).
- Costs: Traders pay a spread (the difference between the buy and sell prices) as well as any applicable commissions. If you hold an overnight position, you can pay or take a rollover (incurring financing costs) depending on the interest rate differentials.
- Leverage: Forex can be traded on leverage, allowing one to manage a prominent position with a small deposit. Although this increases the gains, it also increases the losses.
- Regulation: The US residents are required to use only the brokers that are regulated by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). Offshore brokers are unregulated, a significant security risk.
Mini Step-by-Step:
- Create an account: Select a regulated provider. Websites such as STARTRADER give their qualified clients access to international markets.
- Fund: Deposit USD.
- Select Asset: Choose EURUSD.
- Size: Determine the size of the lot based on the risk.
- Protect: Place Take-Profit and Stop-Loss.
- Review: Monitor rollover charges as long as the account is held after 5:00 PM EST.
To understand how seasoned traders manage such positions, an educational resource that may be beneficial to study is the field of CopyTrading, which allows for observing market strategies in action.
EUR-Focused Funds
Currency funds and euro-hedged ETFs offer the opportunity to be exposed to the euro or European markets using a regular brokerage account.
- Currency ETFs: This type of fund holds euro cash deposits or futures contracts to track the price of the euro against the dollar.
- Euro-Hedged Funds: These are either equity or bond funds that invest in European companies but hedge their currency risk through derivatives. In contrast, unhedged funds expose you to fluctuations in the currency and stock markets.
Note: The expense ratio (annual fee) and tax structure should always be checked. Certain currency funds are not taxed as normal stock USFs in the US.
Multi-Currency /Euro Accounts and Certificates of Deposit
Multi-currency accounts at a bank can enable you to keep cash in euros when you are going on holiday or other high-liquidity but low-returning expenses.
These accounts are similar to regular checking or savings accounts, but you can keep your balances in EUR.
- Fees: Be aware of currency conversion spreads during fund transfers and monthly maintenance fees.
- Use Case: Ideal for savers who want to take a vacation in Paris, get married in Italy, or study abroad in another country.
- Availability: These are not available for retail purchase from many US banks; you may need to enlist the services of an international specialist bank or a fintech provider.
Euro-Denominated Bonds/Funds
The acquisition of euro-denominated bonds has the potential to generate interest in euros, but it comes with interest rate and credit risks, as well as currency fluctuations.
- How it works: You lend to a European government (such as Germany or France) or to a company. They are paying you euros in the form of coupons (interest).
- Risks:
- Duration Risk: An increase in European interest rates causes bond prices to decrease.
- Credit Risk: It refers to the risk of default by the issuer.
- FX Risk: If the euro falls 10% against the dollar, your bond returns may be reduced or eliminated when converted to USD.
Futures & Options
Derivative contracts, such as futures and options, are traded on regulated exchanges, where substantial capital and expertise are required to hedge or speculate.
Euro FX futures are standard contracts that allow you to either purchase or sell a specified number of euros at a future date. They are called marked-to-market daily, meaning you must maintain a margin balance to ensure the account remains in good standing.
The futures options enable you to acquire the right (not the obligation) to trade currency at a pre-established rate. These are not typically beginner-friendly, as they are complex and can lead to rapid losses.
Physical Cash
Keeping hardcopy euro banknotes offers instant liquidity when needed to travel, but is certainly ineffective as an investment option due to the security risks and high exchange rates.
Holding a pile of euros in a safe is hardly a sound investment policy. Physical cash earns no interest, is prone to theft, and the cost of acquiring it is often offset by a high spread (usually 5% or more) at a currency exchange bureau.
How to Invest in Euros – Choosing the Right Route
To choose the most appropriate investment vehicle, it is essential to match the time horizon and risk tolerance with the costs and mechanics of individual products.
Quick decision flow
- Short-term Speculation: When the risk-taking is high, and you want to trade the price moves, you go to Spot Forex.
- Medium / Lower: When you do not intend to trade actively but to have exposure to markets, EUR-based Funds, or Bond Funds.
- Spending/Travel: If you need to use the actual currency later, then the Multi-Currency Account is the best option.
Costs & Risks to Compare
You must compare the spreads, commissions, management fees, and the cost of overnight financing with the possibility that the currency may appreciate.
| Route | Primary Cost | Primary Risk |
| Spot Forex | Spread & Overnight Financing | Leverage & Volatility |
| Funds/ETFs | Expense Ratios (Annual fees) | Market Risk & Tracking Error |
| Bonds | Markup on price | Interest Rate & Credit Risk |
| Bank Account | Conversion Fees | Inflation & Opportunity Cost |
Step-by-Step Example: Opening and Placing a First EURUSD Trade
Trading in EURUSD involves ensuring that you are eligible, depositing funds into your account, determining your position size, and implementing risk control through stop-loss orders.
- Check Eligibility: Ensure you are qualified to trade with a US-based provider (verify NFA membership) and complete a full Know Your Customer (KYC) identification process.
- Fund the Account: Deposit USD. You will need to know that in the EURUSD, the Euro is the Base currency and the USD is the Quote currency. Purchasing EURUSD implies that you are buying the euros and selling the dollars.
- Position Sizing: Use a calculator. A common rule is to limit your exposure to no more than 1-2% of your account capital on any single trade.
- Place Order:
- Select Market: Order to buy immediately or to buy at a certain price using a Limit Order.
- Place Stop-Loss: This is where the trade is stopped out automatically to prevent additional loss.
- Attach Take-Profit: Your target price to make profits.
- Track Catalysts: Monitor key economic calendar events, such as the ECB’s Monetary Policy Decisions or the US Non-Farm Payrolls.
- Check Rollover: This is preferably determined by whether you are paying or earning interest (that is, a swap).
Risk Management For EUR Exposure
The primary tools for risk management include limiting leverage, utilizing stop losses, and diversifying asset classes to mitigate the effects of currency volatility.
Currency markets are very liquid and may be volatile.
- Leverage: It may seem that a broker is offering a 50:1 leverage, but that does not imply that you should take it. High leverage may drain accounts fast.
- Gap Risk: Prices may leap during the weekend (or other significant news events) and bypass stop-loss orders.
- Diversification: Never invest all your money in a single currency couple.
- As a Bond/Fund Investor: Note that currency-hedged products have less FX risk, but they do not guarantee the absence of underlying asset risk (e.g., European stock market crashes).
The FX market has been declared the largest in the world by the Bank for International Settlements (BIS), but its depth does not guarantee safety against volatility.
Taxes and Compliance
Currency investing is taxed differently depending on the instrument, and there could be differences between spot forex, futures, and equity funds.
- Section 988 vs. 1256: The spot forex is usually taxed as an ordinary income/loss under IRC Section 988 in the US, but regulated futures are subject to tax under Section 1256 (60% long-term / 40% short-term capital gains).
- PFIC Rules: Purchasing non-US domiciled funds (for example, a European mutual fund) may trigger Passive Foreign Investment Company (PFIC) rules, which impose complex and punitive taxes on US citizens.
- Record Keeping: You must maintain accurate records of all conversions and trades.
The advice of an experienced tax specialist should be sought in all cases.
FAQs
Can I buy euros in a US brokerage account?
The majority of regular US stock brokerage accounts will not allow you to keep cash euros directly. However, you can purchase ETFs that track the euro or trade currency futures when you are permitted to trade derivatives. In the case of direct cash, you typically require a multi-currency bank account or a foreign exchange trading account.
Is investing in euros safe?
There is no totally safe investment. Although the euro is a key reserve currency, its value against the dollar fluctuates depending on economic conditions. There is a market risk associated with investing in it, and the risk of losing more than your initial investment is also present in leveraged trading.
What is the best time to buy euros?
There is no definitive best time, but investors tend to find opportunities when the US Federal Reserve is reducing interest rates or when the Eurozone economy presents increasingly better growth statistics than the US economy.
Do I pay taxes on gains from selling euros?
Yes, U.S. residents are generally obligated to report gains on currency transactions. The exact tax rate will be determined by whether you are trading in spot forex, futures, or ETFs. IRC Section 988 and Section 1256, along with their details, should be referred to by a tax advisor.
Conclusion
You can gain diversification and hedge against investing in euros, but you need to choose the instrument wisely that aligns with your financial objectives.
You can buy or sell short-term movements through spot forex, insure a trip to Europe in the future through a multi-currency account, or invest in a multi-currency bond. Either way, you need to know the cost to get in and the risks that are present.
The first thing that you need to do is to define your purpose, either speculation, hedging, or diversification, and then do your research on the particular kind of providers that you find in your area.
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