Some investors use gold and precious metals ETFs to hedge against a weaker U.S. dollar. However, there are also “inverse” ETFs that short the dollar and profit from a declining greenback.
For investors positioning for a weaker dollar, the PowerShares DB US Dollar Index Bearish (NYSEArca: UDN) tracks the performance of a basket of currencies against the greenback. Six overseas currencies are represented with the euro holding the most weight. [What is an ETF? – Part 15: World Currencies]
“Prospects for the U.S. dollar have weakened substantially in light of large budget and trade deficits compounded by the Fed’s response to the financial crisis. The current quantitative easing programs employed by the Federal Reserve are tantamount to printing currency, which could further weaken the U.S. dollar. Over the past decade, the U.S. dollar has already declined by about 20% compared to a trade-weighted, broad basket of currencies,” Michael Rawson wrote in a recent Morningstar article.
Short term currency prediction is hard to call and a foreign-currency fund has its legitimate uses as either a short-term, low-risk holding or as a cheap hedging instrument.
Two main factors move currencies: the relative growth of monetary bases and the relative growth of the underlying economies using those currencies. [Chart of the Day: Euro ETFs]
The U.S. dollar is still a reserve currency and is viewed as a safe haven. For the long term, Morningstar analysts are predicting a weak greenback as the United States has current account and budget deficits. [ETFs That Track the U.S. Dollar]
Alternative ETF choices include:
- PowerShares DB G10 Currency Harvest (NYSEArca:DBV)
- WisdomTree Dreyfus Emerging Currency (NYSEArca: CEW)
- WisdomTree Emerging Markets Local Debt (NYSEArca: ELD)
Tisha Guerrero contributed to this article.