As the U.S. dollar continues its forward march, foreign currency exposure will be a significant risk for international exchange traded fund investors.
Rich Bernstein of Richard Bernstein Advisors argues that the U.S. dollar will continue to appreciate against a basket of foreign currencies due to deflation of the global credit bubble, reports Dimitra DeFotis for Barron’s.
“A strong dollar and disinflation/deflation seem more likely than inflation so long as global overcapacity forces nations to fight for market share and depreciate their currencies,” Bernstein said.
Many foreign central banks have cut rates or enacted other loose monetary measures to help stimulate their local economies and depreciate currencies in a beggar-thy-neighbor policy. For instance, Sweden, Denmark, India, Canada and Switzerland all shifted their monetary policies, following the ECB’s aggressive trillion-euro bond-purchasing plan. [USD ETF Advances in Ongoing Currency War]
Meanwhile, the U.S. dollar has been appreciating as speculators expect the Federal Reserve is more likely to hike rates, which would strengthen the dollar. Over the past year, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has increased 20.8% and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) gained 16.6%. [King Dollar ETFs Assert Their Royalty]
Consequently, now that the USD is on an upward trajectory, investors who want overseas exposure will have to consider currency risks.