As countries grapple with deflationary pressures and fuel a currency war to encourage inflation, the U.S. dollar exchange traded fund could capitalize on the lower foreign exchange rates.
Many global governments are targeting lower exchange rates as a way to combat crippling deflation, Bloomberg reports. Of the bottom 10 currencies expected to experience the largest declines through 2015, eight currencies are from issuing countries that are either stuck in deflation or enacting policies to purposefully depreciate their exchange rates.
“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at HSBC Holdings Plc, said in the article. “This is about deflation, exporting your deflationary problems to someone else.”
Consequently, the policy changes in response to falling prices could further support the U.S. Dollar as the Federal Reserve aims to cut back on its loose monetary policies. For instance. the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has increased 5.5% year-to-date. UUP tracks the price movement of the U.S. dollar against a basket of currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. [U.S. Dollar ETF Reveals a Shifting Currency Market]
Additionally, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) has gained 2.9% so far this year. USDU tracks the USD against a broader basket of developed and emerging market currencies – the euro, yen, Canadian dollar, Mexican peso, pound sterling, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real.
Meanwhile, for the more aggressive trader, the PowerShares DB 3x Long US Dollar Index Futures ETN (NYSEArca: UUPT), which provides a leveraged 300% bullish monthly return to the U.S. dollar futures index, jumped 16.4% year-to-date.
Last month, Bank of Japan Governor Haruhiko Kuroda wants a lower exchange rate to help foster inflation and could extend the stimulus program to achieve his goal.
Meanwhile, European Central Bank President Mario Draghi has stated that a weaker euro will be required to avoid deflation and help make exports more competitive. Many Eurozone economies rely on exports for growth, but deflation and a strong euro currency make Eurozone goods more expensive to foreign buyers. [Diverging Fed, ECB Policies Pressure Euro ETFs]
According to currency strategists, the Japanese yen will be the biggest loser among major currency by the end of 2015 and the euro is expected to be among the 10 largest losers as well. [Japanese Yen ETFs Face Major Headwinds]
More aggressive traders can bet on the currencies’ fall through the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the U.S. dollar price of the yen; the ProShares Short Euro (NYSEArca: EUFX) tracks the inverse, or -100%, daily performance of the U.S. dollar price of the euro; and the ProShares UltraShort Euro (NYSEArca: EUO) and Market Vectors Double Short Euro ETN (NYSEArca: DRR) both provide double inverse, or -200%, the daily performance of the USD price of the euro.
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.