When investing in overseas markets, some investors have turned to both international stocks and a currency-hedged strategy to even out foreign exchange fluctuations. Alternatively, people can look to partial currency-hedged exchange traded funds to help diminish currency risks, especially as the U.S. dollar experiences short-term volatility.
“Investors are being whipsawed by gyrations in the currency market,” Adam Patti, IndexIQ chief executive officer, said in an email. “Just on Wednesday, the U.S. dollar had one of its worst days in months, dropping nearly 2% versus the Japanese yen. This came on the heels of last Friday’s news that the Bank of Japan was moving to a negative interest rate policy, which at that time spurred a rise in the dollar.”
The greenback continued to slide Thursday, with the Dollar Index down 0.7% to 96.57. Among the major currencies, the euro currency gained 0.9% to $1.12. Additionally, the dollar weakened against the Japanese yen, depreciating 1.0% to ¥116.78.
The USD has been weakening ever since New York Fed President Bill Dudley said that financial conditions have tightened in the weeks since the Federal Reserve’s rate hike in December, adding to speculation that the Fed would hold off on four rate hikes this year.
“Even in less tumultuous times, correctly predicting the direction of the dollar versus major international currencies is an incredibly challenging proposition, but in a time of divergent central bank policies, and increased uncertainty about what different central banks (including our own) might do next, taking a currency neutral view when it comes to international equity investing may be worth a close look,” Patti said.
Many advisors are already implementing some form of a 50% hedge against foreign exchange moves by investing in two different ETFs – one hedged and one unhedged. However, this leaves investors with more work when rebalancing a portfolio, which would incur additional transaction fees as well as short-term capital gains.