If the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback. Consequently, a non-hedged international investment will experience lower U.S. dollar-denominated returns.
Extended weakness in the euro and any rebound for the dollar could renew the allure of ETFs such as the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) and the iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU).
“The problem is when the euro was constructed, two important mechanisms of adjustment used when a country hits a shock — the exchange rate mechanism and the interest rate — were taken away,” Stiglitz told CNBC.
The common currency survived speculation in recent years that Greece could depart the Eurozone, which did not happen. Although the chatter has yet to reach a comparable level, market observers are increasingly concerned Italy, the Eurozone’s third-largest economy, is a credible candidate to leave the Eurozone as the economy there stagnates and bad loans weigh on the country’s banks.
For more information on hedged options, visit our currency hedged ETFs category.
CurrencyShares Euro Currency Trust