The Falling Dollar and Currency ETFs

It is no secret that the U.S. dollar has been falling against other major currencies, as evidenced by exchange traded funds (ETFs) and related investments.

The dollar's value dropped 10% against the euro, and is down 40% from its October 2000 high. David Kathman for Morningstar reports that the dollar also dropped 6% versus the Japanese yen and also hit a 25-year low against the British pound. The pound, as we said earlier today, has fallen on some hard times of its own.

Essentially, this means the investors around the world have lost confidence in the future stability of the dollar, and, as a result, they are more confident in currencies such as the euro. Effects of the weakening dollar are complex, but the good side is that foreign buyers can come into the U.S. and spend their money. With the dollar's weakness, these ETFs have posted great returns the past couple of years (the percentage that follows is their one-year performance unless otherwise noted):

• CurrencyShares Australian Dollar Trust (FXA), up 19.4%

• British Pound Sterling Trust (FXB), up 5.3%

• Canadian Dollar Trust (FXC), up 19.1%

• Euro Trust (FXE), up 18.7%

• Japanese Yen Trust (FXY), up 8.3% since inception

• Mexican Peso Trust (FXM), up 6.5%

• Swedish Krona Trust (FXS), up 14%

• Swiss Franc Trust (FXF), up 16%

Performance chasing is generally not a good idea, especially since currency movements are unpredictable and volatile. Do your research first.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.