U.S. investors must be beginning to feel as if they’re plugging holes on a sinking ship: as soon as one breach is remedied, another bursts open. It appears that the worst of the recession is behind us, as consumer confidence (and more importantly, spending) have begun to show signs of life. But now the U.S. dollar is dropping like a stone, recently falling by more than 10% against the euro. So just how big of an issue is a tumbling greenback for U.S. investors? Jason Zweig at the Wall Street Journal recently pointed out that the impact will vary significantly depending on individual circumstances.
“If most of your assets are in dollars but much of the goods and services you consume are priced in other currencies — say you like imported cars or regularly vacation abroad — your future spending needs have just gotten harder to fund,” notes Zweig. “But if you make your money in the U.S. and spend it in the U.S., a falling dollar isn’t the end of the world.”
For investors who do stand to be impacted by the declines in American currency, there are three core solutions: foreign currencies, gold, and a diversified basket of commodities. To borrow the now well-known Apple tag line, there’s an ETF for that.
Here’s a look at three ETFs that may be ideal for investors looking to hedge against a further decline in the dollar (or for speculators looking to make a quick buck):
- PowerShares DB U.S. Dollar Index Bearish (UDN): Perhaps the best option for a falling dollar, UDN tracks a rules-based index comprised of short USDX futures contracts. This ETF is designed to replicate the dollar’s performance against a variety of currencies, including the Euro, Yen, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. For investors who think the dollar has bottomed out and is due for a comeback, PowerShares also offers a bullish dollar ETF: UUP.
- SPDR Gold Trust (GLD): One of the largest and most heavily-traded ETFs available, GLD invests directly in gold bullion, which tends to appreciate as the dollar depreciates. Gold is also a popular “safe haven” investment, meaning its value tends to spike in times of economic uncertainty. For investors looking for a way to invest in gold stored outside the U.S., ETF Securities offers its Physical Swiss Gold Shares (SGOL), and ETF that provides valuable geographic diversification for investors with big holdings in the yellow metal.
- PowerShares DB Commodity Index Fund (DBC): DBC invests in a diversified basket of commodity futures, including crude oil, heating oil, gold, aluminum, corn, and wheat. In a year of volatile commodity prices, DBC has seen its share of dips and jumps, and had recently gained about 3% to date in 2009.
The inverse relationship between foreign currencies and the U.S. dollar is clear enough (currency trading is, after all, a zero sum game). The relationship between the U.S. dollar and gold is less clear, and has become significantly more cloudy in recent years. Gold is, in some senses, a competing currency to the dollar. As the dollar shows signs of weakness, investors will generally turn to gold as the safe haven investment of choice.In the current economic environment, however, many analysts believe this relationship has weakened significantly.
Disclosure: No positions at time of writing.