The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is up 2.7% year-to-date, surprisingly making it one of the better-performing non-leveraged currency exchange traded funds despite the best efforts of the European Central Bank (ECB) to weaken the common currency.
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.
“The remainder of 2016 and 2017 will see several political events with potential influence over the Eurozone. The United Kingdom may invoke article 50 in 2017, triggering a two year timeline in leaving the European Union. However, as of now, the governing Conservative Party in the United Kingdom appears to be split over a ‘hard’ or ‘soft’ Brexit,” according to OptionsExpress.
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).