How to Play a Weak Dollar With ETFs
October 13th at 11:00am by Tom Lydon
The dollar and its related exchange traded funds (ETFs) just can’t get a break and continue to lose ground to counterpart currencies. This doesn’t mean that investors need to sit idly by – there are opportunities when a currency is weak.
Most recently, policy makers have boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, report Ye Xie and Anchalee Worrachate of Bloomberg. The currencies of choice are the euro and yen, which account for nearly 63% of new cash. Read more about using currency in your portfolio here.
The world is flush with dollars as the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. This, in turn, is making the dollar less of a diversifier for investors. To add to the currency’s woes, foreign corporations and economies are starting to feel the effects of a weak dollar, as well.
From an investor’s perspective, one can play the PowerShares DB Dollar Bearish (NYSE:UDN) which is up 7.6% year-to-date.
For a more optimistic approach, one can play the Euro through the Rydex CurrencyShares Euro Trust (FXE) which is up 6% year-to-date.
As for the yen, it can be played through Rydex CurrencyShares Japanese Yen Trust (FXY) which is up 0.4% year-to-date.
By holding non-dollar-denominated assets, such as emerging market equities, investors can hedge against weakness. iShares MSCI Emerging Markets (NYSEArca: EEM) is up 60.9% year-to-date. Read about what emerging markets can do for your portfolio here.
A weak dollar can also be hedged with commodity ETFs, including United States Oil (NYSEArca: USO) and iShares COMEX Gold Trust (NYSEArca: IAU). Dollar-denominated assets tend to become cheaper for overseas buyers, which often leads to a spike in prices.
For more stories on currency ETFs, visit our currency ETF category.
Read the disclaimer, Tom Lydon is a board member of Rydex Funds.
For full disclosure, Tom Lydon’s clients own shares of EEM.
Kevin Grewal contributed to this article.
