A weak U.S. dollar helps U.S. manufacturers, U.S. exporters and U.S. multinationals, writes Gary Gordon for ETF Expert. But a weak dollar means foreign exporters and foreign manufacturers are hurting as they try to sell to the U.S. market. (What’s so great about a weak dollar?)

For example, the strong euro is bad for business in the Eurozone. In August, exports dropped 6% from the previous month because of an appreciating euro. (More on the eurozone).

• CurrencyShares Euro Trust (NYSEArca: FXE): up 5.1% year-to-date

Japan is another country watching its currency appreciate. The Japanese yen is likely to stay stable since the island nation is heavily export dependent.

• CurrencyShares Japanese Yen Trust (NYSEArca: FXY): up 0.2% year-to-date

Both FXE and FXY are in an uptrend, tracking above their 50-day and 200-day moving averages.

As it stands, Europe and Japan don’t have much room to further decrease the value of their currencies through monetary policies since interest rates are already so low. Still, the U.S. dollar can’t go on depreciating forever.

For more information on world currencies, visit our currency category.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

Because of government restrictions, capital controls and sometimes liquidity issues, WisdomTree applies currency contracts, or non-deliverable forwards, and U.S. dollar-denominated short-term government and commercial paper in its foreign currency funds, writes Don Dion for TheStreet.

A forward contract is an agreement to exchange currencies at a predetermined rate at a specific time. The benefit is that the contracts allow foreign investors to gauge the return of a money market fund in a foreign currency. (Read our currency special report).

WisdomTree uses forward contracts to reflect foreign currency holdings in its Chinese, Brazilian and Indian currency ETFs. Its Japanese yen and euro ETFs hold short-term yen  and euro debt. WisdomTree’s currency ETFs have been outperforming the underlying currency thanks to implied yields in forward contracts.

• WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSEArca: CYB): up 1.8% year-to-date
• WisdomTree Dreyfus Brazilian Real Fund ETF (NYSEArca: BZF): up 35.7% year-to-date
• WisdomTree Dreyfus Indian Rupee (NYSEArca: ICN): up 9.5% year-to-date
• WisdomTree Dreyfus Japanese Yen Fund ETF (NYSEArca: JYF): up 0.5% year-to-date
• WisdomTree Dreyfus Euro Fund ETF (NYSEArca: EU): up 8.6% year-to-date

Interest rates are a major determinant in forex prices. For example,  country “X” has a higher interest rate than country “Y,” and a person from country “Y” purchases a forward contract to exchange currency “Y” back to currency “X” at 2-to-1 in one year. A person would lock in the exchange rate in the future and would profit from the higher interest rate with no risk – this is known as arbitrage. Traders would then buy up the foreign currency until the exchange rate no longer overcompensates for the higher foreign interest rates.

Potential currency traders should note that trading in currencies includes risks, and trading in emerging market currencies carries even more risk. Have a strategy when you invest.

For more information on foreign currencies, visit our currency category.

Max Chen contributed to this article.

The Japanese yen is gaining strength, which is putting exporters on guard because of the threat it poses. Strategist Fumiyuki Nakanishi said the dollar-yen rate and the performance of exporters would likely determine the Nikkei’s direction this week, with the ultimate goal of keeping the ratio above 1,000.

Many analysts and insiders say it is not “right” to deliberately weaken the yen through market intervention, report Colin Ng and V. Phani Kumar for The Wall Street Journal. The dollar-yen rate and the performance of exporters would likely determine the Nikkei’s direction this week.

In response, Japanese government bonds were higher as Tokyo shares dropped steeply. The stronger yen may hurt exporters, but ETF investors can capitalize in a few ways:

• CurrencyShares Japanese Yen (NYSEArca: FXY): down 0.42% year-to-date

• WisdomTree Dreyfus Japanese Yen (NYSEArca: JYF): up 0.6% year-to-date

For more stories about Japanese yen, visit our Japanese yen category.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

The Japanese yen has been on an upswing in recent weeks as investors search for the safest assets. Deborah Levine for MarketWatch reports that the overall sentiment over the global economy, mixed with down Japanese data has been causing the yen to rally.

The Macro Trader on Seeking Alpha reports that although inflation will not be here tomorrow, governments have printed lots of currency. Until that money is circulating, the super inflation many anticipate will not kick in. Rather than seek the Japanese yen for its usual carry-trade appeal, many are turning to the yen as a safe haven from inflation.

Macro Trader notes that each time investors have fled risky assets such as stocks and corporate debt, they have flocked to the yen (among other things) as an alternative. The currency and fixed income markets are good indicators of high and low risk and could be a part of your strategy and trend following plan in tumultuous times.

• CurrencyShares Japanese Yen Trust (FXY): up 7.2% over three months

• WisdomTree Dreyfus Japanese Yen (JYF): up 7.2% over three months

For full disclosure, Tom Lydon’s clients own shares of FXY.

For more stories about the Japanese yen, visit our Japanese yen category. For more information about currency trading, visit our currency special report.

U.S. stocks and exchange traded funds (ETFs) see-sawed in and out of positive territory this morning on news that consumer confidence rises more than forecasted.

Indicators that consumer confidence is on the rise overshadowed any losses elicited by concerns that the global recession will be prolonged because of the swine flu and the poor performance of some banks on the federal government’s stress tests.

The Conference Board’s consumer confidence index rose to a whopping 39.2 in April as stocks recovered, mortgage rates dropped, and despite increasing unemployment rates, Americans thought that more jobs will be created, giving the index its biggest gain since 2005. This is great news for the economy in that it improves the odds that the recent gains seen in consumer spending are sustainable, some government actions are starting to pay off and the recession could possibly be easing, states Shobhana Chandra of Bloomberg.

The swine flu has definitely impacted global markets. Many investors remain on the guard for any further developments. The World Health Organization has raised its alert, just short of a full pandemic, states Pan Pylas of the Associated Press. This has forced many investors to shun away from riskier investments like stocks and turn to safe haven assets like the U.S. dollar and the Japanese yen.

More news has hit the financial sector. It seems that giants Bank of America (BAC) and Citi (C) didn’t pass the federal government’s stress tests with flying colors. Officials state that the stress test results indicate that both banks may need to raise additional capital. This doesn’t mean that these banks are drowning in the ocean, the additional capital could be needed to meet the requirements the extra capital buffer required by the government, states the Associated Press.

In auto news, Chrysler lenders and the Treasury have been reported to reach a deal, says Poornima Gupta for the Associated Press. The terms haven’t been disclosed, however.

There is yet another sign that the housing market may have bottomed out. Despite dropping again, for the first time in 25 months, home prices didn’t set another record. More appealing mortgage rates and an astronomical number of foreclosures has made the real estate industry a bit more appealing for those who can get a loan. Additionally, the Standard & Poor’s Case-Shiller Index tumbled 18.6% from February 2008, slightly better than the 19% it dropped in January, states the Associated Press. Recently, the real estate industry has started to see a little life, which can be seen through the iShares Dow Jones U.S. Real Estate (IYR), up 23.8% over the last month, despite being down about 13.8% for the year.

The earnings season has done fairly well for the first quarter of 2009, with nearly 68% of S&P 500 companies beating analyst expectations, drug maker Pfizer (PFE) can now be included in this group. Despite posting a 2% decline in profits, the company reported earnings of $0.54/share beating expectations of $0.49/share.

The Dow Jones Industrial Average was up about 0.1%, the S&P 500 gained nearly 0.05% and the Nasdaq was up about 0.2% in intraday trading.

Kevin Grewal contributed to this article.

Assets: $283 million

Holdings: This fund tracks the interest rates of the U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone and the Swedish krona. DBV looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest.

Objective

The ETF seeks to capitalize on the trend the currencies with high interest rates generally tend to rise in value relative to currencies that have low interest rates. DBV looks at the three-month interest rates of the G10 currencies and goes long on the three with the highest rates and short on the three with the lowest.

What’s Good

DBV gives investors a way to play the carry trade, which is gathering steam after a hiatus.

After developed economies reduced their interest rates to practically nothing, emerging markets with interest rates that are around 12.9% higher now look rather enticing, report Kim-Mai Cutler and Bo Nielsen for Bloomberg.

The Latest News

Goldman Sachs has begun recommending carry trades, which had been on their biggest losing streak in three decades. Thank stimulus plans and near-zero interest rates. In some emerging markets and commodity-rich nations, interest rates are as much as 12.9%, or even higher. From March 20 to April 10, the carry trade saw its biggest three-week gain since at least 1999.

How do currencies traders make a profit off “carry trades?” Well, traders use funds from countries with lower borrowing costs to invest in places with higher rates, and they would then reap in the differences in interest rates. Last year, this strategy was abandoned after volatility, as a result of the central bank policies of individual countries, led to large currency swings.

Typically, people would use dollar, euro and yen to buy up currencies from Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia.

• PowerShares DB G10 Currency Harvest (DBV): up 5.4% year-to-date

Max Chen contributed to this article.

The dollar has healed itself against the euro over the past six months, however, a major currency trader is not feeling bullish toward the U.S. dollar. George Soros is a major currency trader and has stated that the dollar remains vulnerable and could be replaced as the world’s reserve currency by a basket of denominations, including the euro, yen and British pound.

David Sherchuk for Forbes reports that the world’s financial system needs to be reformed so the dollar is subject to the same discipline imposed on other currencies. The United Nations believes that in order for the world’s economy to stabilize, the world should move to a collection of currency, rather than one.

Overall, here are some comments about the health of the U.S. dollar:

• George Soros says the dollar’s strength is a sign of the system’s sickness and the euro will actually remain viable.
• Greg Ghodsi, head of the 360 Wealth Management Division at Raymond James, says the decoupling theory is over. The world is one big marketplace, with the United States as the driving force. Ghodsi’s opinion is if our consumer spending habits drop permanently, the world will need someone to pick up the slack and start buying.
• John Osbon, head of Osbon Capital Management, says the twin deficits – soaring spending and free money – are bad for the dollar, but what currency isn’t facing the same situation or even worse? The future direction of currency is unknown.

This is true, which is why we employ a trend-following strategy. Instead of trying to guess where the U.S. dollar is headed, especially at such a turbulent time, watch trend lines to see where the potential for a long-term uptrend exists.

• PowerShares DB U.S. Dollar Bullish (UUP): up 3% year-to-date

• PowerShares DB U.S. Dollar Bearish (UDN): down 3% year-to-date

The yen carry trade consisted of borrowing currencies from low interest rate countries like Japan and investing in higher-interest rate countries like New Zealand and Australia. Gary Gordon for ETF Expert reports that during the credit crisis, the yen strengthened by far as Australian dollars and New Zealand dollars declined rapidly. Borrowers had to quickly repay those borrowed yen loans to avoid further losses, further strengthening the yen in a self-fulfilling prophecy-like fashion.

As of late, the Japanese yen ETF has pulled back sharply and is 7.6% off its high reached last December.

Many wonder if the risk-taking has resumed once again among investors. Those who look ahead may assume that the U.S. dollar may resume a downward trend at a time when neither the United States nor Japan will be in a position to raise interest rates. Meanwhile, Australia, New Zealand, Norway… even the European Monetary Union might be in a better position to do so.

• PowerShares DB G-10 Currency Harvest (DBV): up 4% year-to-date

• CurrencyShares Japanese Yen Trust (FXY): down 4.3% year-to-date

• If you believe the yen will continue to depreciate, there’s the ProShares UltraShort Yen (YCS).

Read the disclosure, as Tom Lydon is a member of the board of Rydex Funds.

This morning, Bernanke spoke and said that executive compensation must be monitored.

Fallout over the much-maligned AIG (AIG) bonuses continues, as the House voted in favor of a 90% tax such bonuses at companies that received federal bailout money, report Carl Hulse and David M. Herszenhorn for The New York Times. The Senate is expected to consider a similar tax, but with some differences.

On Wednesday, Bernanke announced plans to increase the Fed’s balance sheet, which includes buying $300 billion in long-term Treasuries. The move sent foreign currencies sharply higher, while sending the dollar lower. In just two days, the dollar lost 5% against the euro and 3% against the yen, says Madlen Read for the Associated Press.

Commodity stocks are rising midday, too, the day after a big jump in the sector, Chuck Mikolajczak for Reuters reports. Trading could be volatile today, because it marks the expiration and settlement of four different market equity futures and options contracts. The convergence is known as “quadruple witching.”

Oil appears to be taking a break a day after surging past $51 a barrel as traders reconsidered expectations for renewed crude demand while the global economy is still ailing. Oil is hovering below $51 in midday trading.

Some corporations are coming out with their forecasts for the first quarter of earnings season. Among them are:

• Xerox (XRX) is cutting its outlook by nearly 80% based on a technology spending slowdown
• Sony Ericsson (SNE) is warning of a loss in the first quarter because of lower consumer demand
• Lowe’s (LOW) reiterated that it expects a profit, while it also expecte sales to range from a decline of 3% to an increase of 1%

The Federal Reserve said it would expand its balance sheet to include another $750 billion of agency mortgage-backed securities, $100 billion in agency secrities and $300 billion in longer-term Treasury securities over the next six months.

After the announcement, foreign currencies rallied and ultimately brought the rally seen in the U.S. dollar to a grinding halt, leading to its biggest daily drop in more than two decades. Yesterday, the dollar fell 3.8% against the euro and 3.6% against the pound.

The long-term value of the dollar is now being questioned by some officials at Asia’s top think tanks, reports Reuters. Will the dollar remain a key global currency when all is said and done? Asia hopes that any decline in the dollar will be gradual to avoid more shocks to financial systems. For the time being, many market participants believe that the latest stimulus could lead to a prolonged decline in the dollar’s value.

If this is true, we could be looking at upswings in foreign currency ETFs in the near future. Watch the trend lines to see if this bears out, though. Note that these funds have already popped above their 50-day moving averages, and in some cases, the 200-day.

• WisdomTree Chinese Yuan (CYB): up 0.4% in the last week

• WisdomTree Dreyfus Brazilian Real (BZF): up 3.2% in the last week

• CurrencyShares Swedish Krona (FXS): up 9.1% in the last week

• CurrencyShares Swiss Franc (FXF): up 1.2% in the last week