Over the last several months, a perfect storm has been brewing over the U.S. dollar, with record low interest rates, a still unstable financial system, and uncertainty over reserve currency status all contributing to a prolonged slide in the greenback against its major rivals. But those who subscribe to the Warren Buffett investment philosophy of being “greedy when others are fearful” and see and now see an opportunity to buy in at a valley may want to wait a bit longer.
Some of the most accurate dollar forecasters believe the U.S. currency is still far from its bottom, anticipating that the greenback will continue to slide long after the Fed begins raising interest rates (which, based on recent comments, seems to still be far off). Among the downward pressures weighing on the dollar are $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs, a record $4 trillion of government bond sales between 2009 and 2010, and a 10.2% unemployment rate that is yet to peak.
According to Bloomberg, Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc, and Scotia Capital Inc. say the dollar will still depreciate as much as 6.4% versus the euro. Based on interest rate projections, the U.S. will be one of five Group of 10 economies to wait until at least the third quarter of 2010 to begin raising interest rates. The Fed is expected to join the European Central Bank, the Bank of England, and the Swiss National Bank in raising rates, while Japan is expected to do so in the fourth quarter of next year. By the end of 2010, it is projected that only Japan will have lower borrowing costs than the U.S.
While the short-term picture is grim for the greenback, economists are calling for a gradual recovery. Of the 37 economists surveyed by Bloomberg, 24 called for the dollar to appreciate relative to the euro by the end of next year, anticipating a strengthening of the currency as the government begins to unwind the massive stimulus plans implemented to save the financial system.
ETF Plays For A Falling Dollar
For investors who trust the experts and expect the dollar to continue its slide, there are a number of ways to bet on this trend through ETFs. In addition to the funds highlighted below, both Rydex and WisdomTree offer a number of single-currency ETFs providing direct exposure to exchange rates between the dollar and various developed and emerging market currencies. For more ways to play current trends through ETFs, sign up for our free ETF newsletter.
- Market Vectors Double Long Euro ETN (URR): For investors interested in doubling down on a weak dollar, URR offers 2x leveraged exposure to the dollar-euro exchange rate. As an exchange-traded note, URR is a senior unsecured debt security, meaning that it exposes investors to the credit risk of the issuer (Morgan Stanley in this case). URR has gained about 13.6% so far this year.
- PowerShares DB U.S. Dollar Bearish Fund (UDN): For investors who favor the “basket approach” to currency investing over single-country bets, UDN offers an opportunity to profit from the appreciation of a group of developed market currencies against the dollar. UDN offers exposure primarily to the euro, but also includes the yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc.
- WisdomTree Dreyfus Emerging Currency Fund (CEW): Whereas UDN invests in a basket of developed currencies, CEW offers diversified exposure to emerging market currencies. Many of the countries in which CEW invests, including Brazil (7.7%), South Africa (6.7%), and Turkey (6.5%) offer attractive money market yields significantly higher than those available in the U.S., meaning that this fund should gain even if rates remain stable. ETFdb Pro members know that CEW was one of our Actionable ETF Plays for November. The fund has gained about 2.7% this month, and this stellar performance still ranks behind two of our other picks, including one that is up 12% in November (if you’re not an Pro member yet, you can sign up for a free trial or read more here).
Disclosure: No positions at time of writing.