The Federal Reserve chose to keep rates in check yesterday. The U.S. dollar unexpectedly rose following the announcement, but it could be short-lived, warranting the case for a dollar hedging strategy through ETFs like the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF).

“With the Federal Reserve holding its first monetary policy meeting of the year, it would be easy to attribute today’s U.S. dollar rally to the central bank’s comments,” writes Kathy Lien for Investing.com. “However, nothing in Fed Chairman Jerome Powell’s question-and-answer session warranted today’s spike in the dollar and losses in equities. A rally like the one we saw today in the greenback would normally be fueled by hawkish commentary.”

“Instead, the changes to the FOMC statement were slightly more dovish: The central bank acknowledged the moderation in activity and employment in areas hit the hardest by the pandemic and predicted modest inflation this year,” Lien added. “This cautious outlook explains why Powell thinks it’s ‘too early to focus on tapering dates.’ He said they are still a long way from meeting inflation and employment goals, so when it’s time to ‘gradually’ taper, they’ll let us know well in advance. By avoiding any specific time frame on taper, today’s comments should have driven the dollar lower, not higher.”

DBEF seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI EAFE US Dollar Hedged Index. The fund, using a ‘passive’ or indexing investment approach, seeks investment results that correspond generally to the performance, before fees and expenses, of the underlying index, which is designed to track developed market performance while mitigating exposure to fluctuations between the value of the U.S. dollar and the currencies of the countries included in the underlying index.

The fund is up 13% the past few months.

DBEF Chart

The Fed’s Tepid Outlook

More dovishness could certainly add to the case for dollar hedging. As long as the economy continues to languish amid the pandemic, the dollar could see a pullback despite its recent strength.

“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world,” the Fed said in its latest statement. “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.”

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