The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is higher on a year-to-date basis, performing admirably relative to some other developed markets currency exchange traded funds, but the common currency still has plenty of doubters.
Most European market observers have been critical of European Central Bank President Mario Draghi’s stimulus measures. Specifically, many believe the measures have been too little too late, even after the ECB cut all three key rates this month and expanded quantitative easing.
Related: Brexit Opens Opportunity for Europe ETFs
While the ECB’s efforts to weaken the euro this year have not delivered on par with investors’ expectations, some market observers still believe the currency is heading for more downside.
Nobel prize–winning economist Joseph Stiglitz said in an interview with CNBC that the euro is “doomed” if Eurozone policymakers do not make significant structural changes.
[related_stories]Overseas investments have gained popularity in recent years as global central banks enacted loose monetary policies to promote economic growth. However, the accommodative central bank measures would depreciate their respective currencies. Consequently, many investors have turned to currency-hedged ETFs to capture the growth and protect themselves against the foreign exchange risks.
Related: International ETFs: Currency Story Hasn’t Changed
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
