After struggling for much of 2009, the U.S. dollar is back on the upswing thanks not to overwhelming strength in the domestic economy, but sovereign debt issues in Europe and a subsequent “flight to quality” from international investors. Although the mounting debt of the U.S. government presents potential debt problems down the road, the dollar has retained its status as the global reserve currency, despite frequent calls for other currencies to play a more prominent role in global trade. In fact, one of the best performers in the Currency ETFdb Category is PowerShares DB USD Index Bullish Fund (UUP), which is up about 4% for the year after surging in Wednesday trading.
The fund tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index, a benchmark that tracks the dollar’s performance against a basket of developed market currencies including the pound, euro and yen. Several of these currencies have performed very poorly against the dollar this year, especially the pound and the euro. The WisdomTree Dreyfus Euro Fund (EU) is down 6.6% on the year, while the CurrencyShares British Pound Trust (FXB) has slid more than 8%.
Currency ETPs Surging In 2010
But most emerging markets currencies have managed to immunize themselves against the downturn, and several have outperformed the dollar thus far in 2010. Although there are many products that have beaten the dollar this year, the following three currency ETPs in particular stand out, managing to buck the trend against a strengthening dollar and post gains for the year.
Rydex CurrencyShares Mexican Peso Trust (FXM)
The top performer for currency ETPs this year has been FXM, which is up more than 4.3% and is the only fund to beat out UUP’s year-to-date gain. Although the Mexican economy has suffered greatly due to the recession, several economists have been predicting brighter days ahead for the nation. Mexico is starting to show a “strong cyclical recovery” according to an IMF report last week, and the issuance of inflation protected bonds is also helping to lift the currency, signaling to investors that previous issues are now under control. “It shows that Mexico is way past the fiscal jitters of last year,” said Greg Anderson, currency strategist at Societe Generale.
CurrencyShares Russian Ruble Trust (XRU)
As investors regain their appetite for risk but seek to limit their exposure to the euro zone, many are turning to the ruble as a new investment choice. The currency is at a high for the year against the euro due in large part to attractive interest rates. Although a rate of 8.5% is low by Russian standards, this level is significantly higher than returns available in developed markets. “People are rushing to convert their foreign currency into rubles now,” said Vladimir Bragin, chief economist at National Bank Trust in the WSJ. “They see that it’s the place to be.” XRU is up nearly 3% on the year.
Market Vectors Indian Rupee/USD ETN (INR)
The gains in the rupee come after the Reserve Bank of India embarked on a tightening policy last week, raising its benchmark rate by 25 basis points up to 5%. This move, along with a recent upgrade of Indian debt to stable from negative outlook, should help India to increase capital flows into the country. Some estimates have put capital inflows into the country at $3.5 billion thus far in 2010. As India continues to raise rates in order to keep pace with inflation, it will make the country more attractive for foreign investment, which may further strengthen the currency if inflation is kept in check. INR is up close to 3% on the year.
Disclosure: No positions at time of writing.