The world is poised on the brink of a currency war that could have broad implications. On the front lines of this looming battle is an opportunity in exchange traded funds (ETFs).
The threat of a currency war has come as a result of the high debt and low growth currently dogging developed countries, says Luciano Siracusano, WisdomTree‘s chief investment strategist.
“When that happens, it’s difficult to outgrow the debt burden,” Siracusano says. “In the absence of governments raising revenue from economic growth and restraining spending, they have only one option: to let currency get weaker relative to other countries around the world.”
The rising risk of a full-blown currency war is just another example of how interconnected the global economy still is, despite the hope that the world had finally decoupled. [Currency ETFs Get Ready to Rumble.]
Although emerging markets have bounced back faster and stronger than the richest economies have, they are falling back on their high reserves and the fact that their debt is low. Over the long-term, it’s unsustainable. The pressure to increase exports is acute for many countries now, and that pressure is contributing to the lack of cooperation in currency markets, reports Rex Nutting for MarketWatch. It’s commonly seen as the fastest way to boost growth: make your currency weaker, and the sales will come.
Unfortunately, not all currencies can be weak; some need to be relatively strong. Not all economies can be export-driven, either; someone’s got to buy those goods. [Currency ETFs: The Quiet Giant]
Siracusano says that there’s still potential opportunities, particularly in higher-yielding currencies such as the Brazilian real and the Australian dollar.
He also points out that not all currencies are weak. “It’s not as if Japan has had much success having their currency weaken. The yen is at the strongest level in 15 years.”
- CurrencyShares British Pound Sterling (NYSEArca: FXB)
- WisdomTree Dreyfus Euro (NYSEArca: EU)
- ProShares Ultra Yen (NYSEArca: YCL)
“There’s another long-term trend at work that we think investors are focused more and more on,” Siracusano says. “Currencies in emerging economies…they’ve been appreciating over the last several years.”