The almighty U.S. dollar has been flexing its safe haven muscle status amid the coronavirus pandemic. Tailwinds of hope that the U.S. economy will be able to reopen and readjust quickly in a post-coronavirus environment could only fuel gains for the greenback.
Lately, the U.S. dollar has been moving in lockstep with equities, which is uncharacteristic of the two. However, it’s been a recurring trend in today’s markets.
“There has been a disconnect between equities and economics,” said Mazen Issa, senior FX strategist at TD Securities in New York. “So even though there is a risk rally today, the dollar’s performance, in large part, is tied to relative equity performance.”
“This is the situation we’re in right now,” said Issa. “With very low yields, investment alternatives are few and far between and so what it does mean is that the U.S equity market, much like the dollar, is more defensively structured in terms of its sectoral compositions,” Issa said.
Investors looking to capitalize on further dollar strength can look to exchange-traded fund (ETF) exposure via funds like the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU). UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
On the other hand, the actively managed USDU tracks the USD against a broader basket of developed and emerging market currencies, including China, India, South Korea, Switzerland, Australia, Mexico, the United Kingdom, Canada, Japan, and Europe.
USDU provides investors with
- a broad, dynamic, and effective way of gaining exposure to the U.S. dollar against a basket of foreign currencies in an ETF structure.
- an alternatives bucket as a broad-based diversifier as it exhibits strong negative correlations to international equity and bond portfolios.
Another interesting all-world play that hedges against currency fluctuations against the U.S. dollar is the Xtrackers MSCI All World ex U.S. Hedged Equity ETF (DBAW). DBAW seeks investment results that correspond generally to the performance, of the MSCI ACWI ex USA US Dollar Hedged Index.
DBAW uses a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, of the underlying index, which is designed to track the performance of equity securities in developed and emerging stock markets while mitigating exposure to fluctuations between the value of the USD 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.
For more market trends, visit ETF Trends.