The first half of 2010 was a very interesting period for currency ETFs, which look to remain in focus as the second half of the year gets underway and attention turns to central bank rate hikes. One of the biggest news stories from the first half of the year in the world of finance was the rapid deterioration of the euro and the crisis of confidence that this once mighty currency has suffered. Thanks to the sovereign debt issues that continue to plague Europe, many investors have turned their attention to the U.S. dollar as a relative safe-haven during this turbulent time. This has helped to send the PowerShares DB US Dollar Index Bullish (UUP), a fund that tracks the dollar’s performance against a basket of developed market currencies, up by more than 6% on the year, ensuring that the fund is the top performer so far in 2010 in the Currency ETFdb Category.
Despite the surging dollar, some currencies have managed to hold their own against the greenback or even post modest gains thus far in 2010. These currencies represent both developed and emerging markets; some of them have recently hiked rates while others have no plans to do so in the foreseeable future. Below we profile the three currencies that have come the closest to matching UUP’s gains in 2010 and could remain solid investment opportunities heading into the third quarter [also see Five Funds For Riding Out The Storm].
WisdomTree Dreyfus Indian Rupee (ICN)
A recent rate hike from the Reserve Bank of India leaves investors generally bullish on the rupee, as many are looking for the country to further hike rates at its meeting later this month. This is especially true due to the timing of the hike; it was unscheduled and came roughly three weeks before the RBI meeting is to take place. This has helped to boost ICN, which is up 3.2% over the past 52 weeks and basically flat so far in 2010 against the dollar. Investors might also consider the Market Vectors Indian Rupee/USD ETN (INR), which is down 0.2% year to date.
WisdomTree Dreyfus Brazilian Real Fund (BZF)
The Bank of Brazil has hiked rates by over 150 basis points so far this year, which has helped to slow down rising inflation but also boost the real and by extension BZF. In fact, the currency has been a more profitable play on the Brazilian economy this year than EWZ; the most popular equity ETF tracking the Brazilian economy and has sunk by about 15% this year while BZF has managed to post a gain of 2% in the same time period [also see Warning: Use Caution When Investing In Currency ETFs Of Commodity Dependent Nations].
WisdomTree Dreyfus Japanese Yen Fund (JYF)
Despite a sluggish economy and among the lowest interest rates in the world, the yen has been the best performing major currency against the dollar in 2010. JYF has been the top ETF tracking the U.S. dollar/ Japanese yen exchange rate, posting a gain of 6% so far this year. Two more ETFs also offer direct exposure to the yen; the CurrencyShares Japanese Yen Trust (FXY) and the iPath JPY/UDS Exchange Rate ETN (JYN), both of which are up about 6% this year.
Disclosure: Eric is long EWZ.