How to Trade a Stronger Euro

After successful bond auctions in Spain and Italy eased fears of a worsening sovereign debt crisis, the euro rose against a basket of currencies on Thursday, including the U.S. dollar .

“Most of the folks looking for the euro to fall apart here have gotten a surprise this week as obviously that has not occurred,” said Joe Terranova, chief market strategist at Virtus Investment Partners.

The euro had weakened on fears that Portugal, Spain and Italy would see weak demand for their debt and bond yields would soar, forcing the trio to seek aid from the European Union’s bailout fund.

Spain raised 3 billion euro after a strong five-year bond auction. Italy saw strong support for its 6 billion euro auction. The strong auctions came on the back of surprising demand for Portugal’s debt. Portugal had been considered likely to join Ireland in Greece in asking for a bailout, but instead raised $1.6 billion from its auction after China and other investors snapped up the country’s bonds.

European nations were not out of the woods yet, cautioned traders. European Central Bank President Jean-Claude Trichet raised the specter of a rate hike at a Frankfurt press conference on Thursday, indicating that inflation was still on his radar. European inflation rose a greater-than-expected 2.2 percent in December, largely due to higher food prices. Some analysts believe a rate hike could derail Europe’s recovery.

“Trichet’s comments are interesting,” said Kanundrum Capital’s Brian Kelly.

Terranova and’s Tim Seymour were looking at Starwood Hotel as a way to trade a strong Asia and strengthening European economy. Starwood stock was approaching a 52-week high early Thursday morning as it reported that it was expanding its high-end hotel presence in the Middle East. A stronger Europe and continued European strength would boost travel demand.

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