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.”
Many people believe this trend will continue because developing economies are growing, their interest rates are higher and they’re commodity-export driven. Funds like WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW) and WisdomTree Dreyfus Commodity Currency Fund (NYSEArca: CCX) are two ways for investors to get exposure to this trend.
“These are all investment themes that give folks a way to diversify and potentially hedge, should the dollar continue to lose value.”
Of course, the dollar has had periods of strengths, which was last seen from November 2009 until June 2010. Despite the periodic flight to quality, Siracusano says that the long-term direction of the dollar has been down, relative to the rest of the world.
For a fundamental reverse in the weaker dollar, higher interest rates, a faster-growing economy and a willingness to deal with deficits would need to be seen. “Right now, those three things are not on the table,” Siracusano says.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.
Tisha Guerrero contributed to this article.