The US dollar has fallen 4.5 % against the euro this year and 4 per cent against sterling, hitting a new 26 year low against the pound last week. The trade weighted dollar index dropped to its lowest since 1992. This dollar weakness translates into a boost in performance for internation and country specific ETFs.
The reasons for continued dollar weakness include a US economy growing more slowly than many global rivals and interest rates rising fast outside the US while domestic rates remain flat not to mention anxiety over US credit and mortgage markets.
The easiest way to play the weak dollar trend is with international or country specific ETFs. They are not hedged against the dollar so that strength in the underlying currency, such as a stronger Singapore dollar captured through the Singapore ETF (EWS), boosts returns for U.S. dollar based investors.
Rydex also offers a series of foreign currency ETFs such as the CurrencyShares British Pound Sterling (FXB), the CurrencyShares Euro (FXE), and the CurrencyShares Canadian Dollar (FXC).
A couple of Chartwells seven model ETF portfolios have a small position in PowerShares DB G10 Currency Harvest (DBV) which is up 14% year to date. It tracks 10 currencies, going long on the top three currencies with the highest interest rates and going short on the "top tier" three currencies with the lowest interest rates. DBV is currently long on the Australian dollar, the New Zealand dollar and the Pound sterling and short on the Japanese yen, the Swiss franc and the Swedish kroner.
This is not a bad return but relying primarily on interest rates ignores other key factors. It is also a good idea to have some emerging market currency plays in your portfolio. Take for example, the Brazilian real and the Brazil iShare (EWZ). Brazil has been on a spree of cutting interest rates over the past two years and its currency has strengthened considerably. Consumer demand, exports, and investment have been fueling economic growth and a stronger currency has helped keep a lid on inflation. The real has appreciated against the US dollar from R3.95 to one dollar in late 2002 to R1.86 to one dollar last week.
Then there is the PowerShares U.S. Dollar Bearish Fund (UDN) that track the New York Board of Trades U.S. Dollar Index. This index is the most popular measure of the dollar against other currencies; the Euro has a 58% position; Japanese yen 14%; British pound 12%; Canadian dollar 9%; Swedish krona 9%; Swiss franc 3%.
Tuesday, July 24, 2007
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