The U.S. dollar is steadily dropping. Yet, value can be found in certain areas of the market and exchange trade funds (ETFs). Who wins and who loses when the dollar drops off?
The dollar’s value relative to other world currencies has depreciated by a third since 2002, according to the Wall Street Pit. A weaker dollar is asset class supportive, stimulates exports and improves the rate of economic growth; however, a large currency depreciation may lead to inflationary pressures, damage to export industries in the long-term and reduces incentives for export industries to become more efficient. (Unemployment numbers strengthen the dollar).
The ultimate winners of a depreciating greenback include investors, nations with rich resources, American industry and Chinese industry. The losers include China’s Central Bank, other foreign industries and other Central Banks.
ETFs that could be potentially positively impacted include:
- SPDR Gold Shares (NYSEArca: GLD)
- iShares MSCI Brazil (NYSEArca: EWZ)
- Market Vectors Russia (NYSEArca: RSX)
- WisdomTree Dreyfus Japanese Yen (NYSEArca: JYF)
- PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN)
ETFs that could be negatively impacted include:
- PowerShares DB U.S. Dollar Index Bullish (NYSEArca: UUP)
- iShares S&P Global Financials (NYSEArca: IXG)
Market observers recently noticed the inverse correlation between the U.S. dollar index, or DXY, and the S&P 500-stock index, writes Matt Phillips for The Wall Street Journal. Some believe the dollar is set to reverse, but will this result in a pullback in the stock market? (ETFs to take shelter from depreciating dollar).
Oscar Gruss Chief Executive Michael Shaoul produced a chart of the DXY and the S&P from 1990 to 2009, which revealed that the two indexes moved in the same or opposite direction at different times. It is noted that at areas of high correlation, the situation has swiftly reversed course. Shaoul explains that during times of flight-to-safety, DXY’s correlation with the S&P will hold, and the S&P 500 will drop.
However, “if the recovery in the [U.S. dollar] is driven by a stream of better than expected U.S. economic news and corporate earnings then this may be precisely the time for the correlation to move back into positive territory with a recovering USD and rising SPX taking place simultaneously,” Shaoul wrote.
For more information on the dollar, visit our U.S. dollar category.
- SPDRs S&P 500 (NYSEArca: SPY): up 25.9% year-to-date
Max Chen 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.