The U.S. dollar has developed a reputation, well-deserved at that, for being one of the strongest currencies in the world for more than a year. However, the Federal Reserve’s recent decision to pass on raising interest rates could be a black cloud over the greenback.
Another developed market currency, one that can be accessed by an exchange traded fund, could get the benefit of rate hike in the near-term and could be bad news for the dollar, but good news for the CurrencyShares British Pound Sterling Trust (NYSEArca: FXB).
With conservatives strengthening their position in British parliament, winning 323 seats, some market observers believe this now is the time to consider U.K. equities and the related ETFs. On valuation, U.K. stocks are pricier than some major Eurozone markets, but attractively valued relative to other large developed markets, including the U.S.
But sterling and FXB could be the securities as some market participants are betting the Bank of England is inching closer to boosting borrowing costs. [Opportunity With Sterling Hedged ETFs]
Sterling’s slide is “set to change now Federal Reserve Chair Janet Yellen has confirmed the U.S. is still on course to raise interest rates this year, said BNP Paribas analysts including global head of foreign-exchange strategy Steven Saywell. Yellen’s comments on Thursday reinvigorated speculation the BOE will follow suit with tighter policy and that the European Central Bank may expand quantitative easing,” reports Anooja Debnath for Bloomberg.
The stronger British currency can also help bolster returns for United Kingdom ETFs that do not hedge against currency risks. For instance, the iShares MSCI United Kingdom ETF’s (NYSEArca: EWU) tracks U.K. companies and is exposed to shifts in the Forex, so an expanding U.K. market coupled with a stronger pound could translate to greater U.S.-dollar returns.
“Forward contracts based on the sterling overnight index average, or Sonia, still suggest that a full quarter-point increase to the U.K.’s 0.5 percent official rate won’t come until November 2016,” according to Bloomberg.
CurrencyShares British Pound Sterling Trust
