With stocks showing a strong inverse correlation with the U.S. dollar after the credit meltdown, it pays for investors to keep an eye on currency exchange traded funds that follow the greenback.
The impact of the rise and fall of the U.S. dollar on investments is dynamic.
“While over the past 10 years, the U.S. dollar has lost about 30% against a broad basket of currencies, it is still looked at as a safe haven currency. Doubts about the viability of the euro has caused the dollar to strengthen, however, we think the long term trend toward a weaker dollar will remain, as the U.S. faces twin current accounts and budget deficits. One path to improving U.S. financial health is through exports, which would benefit from a weaker dollar,” Michael Rawson wrote in an analyst report for Morningstar. [How and Why to Use Currency ETFs]
PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) is a play on the fall of the U.S. dollar’s value. If the U.S. dollar index drops 10%, UDN will increase by 10%, etc. The U.S. dollar index tracks the price of the greenback against a basket of foreign currencies. The U.S. dollar is the currency that is used to base the movement of other overseas currencies, reports Investopedia. [Two ETFs to Play the US Dollar’s Decline]
PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP) moves in step with the U.S. dollar index. The fund tracks futures contracts that are written against the USDX and mimics the performance of being long on the U.S. dollar versus the euro, yen, pound, loonie, Swedish krona and Swiss franc. [6 ways to Use Currency ETFs]
A related currency fund is PowerShares DB G10 Currency Harvest (NYSEArca: DBV). It uses leverage in its transactions to provide strong returns. It shorts the three weakest currencies in the G10 and goes long on the three strongest currencies in the G10.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.