Despite the ongoing volatility, the Federal Reserve has not shifted away from an interest rate tightening cycle. Consequently, investors should understand the potential effects or rising rates on the markets and incorporate alternative exchange traded fund strategies to adapt to the changes.
On the recent webcast, Positioning Portfolios in a Rising Rate Environment, Joe Benevento, CIO for Americans and Co-Head of Global Fixed Income at Deutsche Asset Management, projected that the tightening Fed monetary policy will only cause rates to rise gradually.
The gradual rate hike projections are based on Deutsche Asset Management’s below consensus view of U.S. GDP expectations and the consumer price inflation outlook for the year head.
Meanwhile, Benevento pointed out that while the U.S. is beginning to hike rates, global monetary policy remains loose, notably from the Bank of Japan and European Central Bank.
Consequently, with the diverging Fed and foreign central policies, we can expect the U.S. dollar to continue appreciating against overseas currencies. For instance, Sebastien Galy, FX Strategist at Deutsche Bank, forecasts the euro currency to potentially weaken below parity to the USD this year and continue to depreciate next year before bouncing back in 2018. Galy, though, anticipates the Japanese yen to weaken against the greenback in 2016 but begin to strengthen after this year’s pullback. Deutsche largely projects the USD to strengthen against G10 country currencies this year.
The USD is currently in a large uptrend, and Galy believes the greenback is a little beyond two-thirds the way through its current cycle, so we may continue to see the dollar strengthen against foreign currencies ahead. Jack Fowler, V.P of Global Client Group for Deutsche Asset Management, also pointed out that USD cycles typically last eight years, with downward cycles showing dollar depreciation up to 50 percentage points – we are only in our fourth year of the current bull cycle, with the USD up 29%.
If investors wish to capture overseas equity exposure but are wary of currency risks, especially in a strengthening USD environment, there are a number of currency-hedged international stock ETFs available.