Now May Be a Good Time to Hedge Against the Dollar

Just when it looked like the dollar was starting to gain the momentum it lost since the Covid-19 pandemic put a stranglehold on the capital markets, the greenback started to retreat on more market uncertainty. The markets are now focused on stimulus measures and whether the White House can agree to terms on a deal.

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin are working to strike up a deal for a larger stimulus package and ongoing talks are just that–ongoing. The hope is to strike a deal for the November 3 election.

“Pelosi’s deadline was real because it’s a practical deadline,” said a Forexlive article. “Americans are going to be voting in 13 days and the Senate is still trying to confirm a Supreme Court justice. It’s going to be a huge bill and there simply isn’t time to get it done. The talks are theatre and if the Senate isn’t considering any deal before the election they’re not considering it at all.”

The markets are also factoring in the fact that current U.S. President Donald Trump may not be able to procure a second term in office.

“Even though all the numbers point to a blue wave, you can’t forget what happened last time and ignore Trump’s unpredictability and the chance he disputes the results,” the article added. “Do you really want to be in US assets over the next month? Who knows what could happen.”

Exchange-traded fund (ETF) investors who want to keep tabs on the dollar can look at the Invesco DB US Dollar Bullish (NYSEArca: UUP) and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU). Despite the effects of the pandemic, UUP is still up 0.69% and USDU is higher by 2.28% year-to-date, according to Yahoo! Finance performance numbers.

EM Currency Hedging Built Into This ETF

While investors can utilize a plethora of currency hedging techniques, one way to do so without overcomplicating the process is via currency-hedged ETFs. One fund that hedges against EM countries is the Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM).

DBEM seeks investment results that correspond generally to the performance of the MSCI EM 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 emerging 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. It will invest at least 80% of its total assets in component securities of the underlying index.

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