“Inverse Dollar ETFs” Continue Rally

by on November 12, 2009 | ETFs Mentioned:

U.S. Treasury Secretary Timothy Geithner said on Wednesday that a strong dollar is key for the U.S. economy, a goal that may please U.S. consumers but that appears increasingly out of the control of the current administration. “We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and…savers but investors around the world,” said Geithner to a group of reporters in Japan.

The U.S. Dollar Is In FreefallGeithner’s comments in Japan were nothing new: he has consistently expressed his belief (publicly at least) that a strong greenback is a major component of a strong, healthy U.S. economy. In recent months, many economists have predicted that a gradually depreciating dollar could boost demand for exports that become cheaper to consumers abroad. Geithner said in Japan that he sees “no contradiction” between the strong dollar policy of the U.S. and its policy of boosting exports.

When Geithner speaks, the world listens, but his thoughts have done little to stem the slide of the dollar in recent months, as a number of factors have pushed it to new lows against several major rivals. Record low interest rates and concerns about the future of the reserve currency status are just two of the obstacles the greenback faces.

In recent months, several developed economies (such as Australia and Norway) have begun phasing out massive stimulus plans by raising interest rates. If more countries follow suit, pressure on the dollar could mount.

“Inverse Dollar” ETF Plays

Understanding the drivers of exchange rates is a complex process, with no simple explanation. While many sophisticated, risk-hungry investors utilize leveraged forex trading to profit from currency movements, there are a number of ETF plays that allow investors to gain exposure to the dollar. These ETFs can be generally categorized into three primary groups: currency basket ETFs, precious metals ETFs, and commodity ETPs.

Currency Basket ETFs

In addition to the line of single currency ETFs from Rydex (which includes ways to invest in movements of both developed and emerging market currencies relative to the dollar), there are several ETFs available that invest in a basket of currencies. These products include:

  • PowerShares DB G10 Currency Harvest Fund (DBV): This ETF tracks an index comprised of currency futures contracts on G10 countries, and is designed to exploit the trend that currencies associated with relatively high interest rates tend to appreciate relative to those with low interest rates.
  • WisdomTree Dreyfus Emerging Currency Fund (CEW): This ETF seeks to deliver returns reflective of both money market rates in certain emerging markets (many of which are significantly higher than the U.S.) as well as changes in the value of these currencies relative to the dollar. For a complete look at how CEW works, see this article.
  • PowerShares DB USD Index Bullish (UUP) and PowerShares DB USD Index Bearish (UDN): Whereas CEW invests offers exposure to a basket of emerging market currencies, these funds offer a way to play the dollar relative to developed markets. As the names suggest, UDN offers a synthetic short position in the dollar, while UUP is a way for investors to play an appreciating greenback. For a more thorough look at how to use UDN, see this guide.

Precious Metals ETFs

Gold (and silver to a lesser extent) has historically maintained a strong inverse relationship with the U.S. dollar, serving as an alternative safe haven investment in times of economic uncertainty. During times of perceived weakness in the dollar, the relative attractiveness of gold and silver increases, causing precious metals ETFs to rise. In recent weeks, gold prices have surged to new highs, with ETFs such as GLD and SGOL spiking as well.

There are a number of ETFs available for investors looking to gain exposure to precious metals prices, including both direct and indirect ETF plays. For a complete look at all of these ETF options, see this guide to Gold ETFs.

Commodity ETFs

Because most commodities are priced in dollars (even outside of the U.S.), the cost of these resources in local currencies declines as the dollar weakens, thereby increasing demand. This in turn generally sets off a rise in the dollar price of commodities.

There are a number of exchange-traded products offering exposure to single commodities, ranging from agriculture (DBA) and coffee (JO) to sugar (SGG) and tin (JJT). There are also several funds that invest in diversified baskets of commodities, with some offering exposure to more than 30 individual resources. See this side-by-side breakdown of these diversified commodity ETFs.

Disclosure: No positions at time of writing.