3 Ways to play a stronger dollar
Central Banks around the world kicked off the holiday season early this year giving the gift of stimulus. China cut interest rates for the first time in two years, while the ECB is promising a wide array of quantitative easing. And just last month, Japan unexpectedly expanded its QE efforts.
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While the trio sparked a global stock rally, it is having the opposite impact on the currency markets, observes Tom Lydon, Editor of ETF Trends. “Not only are developed nations like Japan and European countries having trouble right now but we are also seeing the currency depreciate.” Investors who are not properly hedged may get caught short, warns Lydon. “Even if equities maintain, the currency conversion can be really devastating and many of us have not seen that for decades.”
To avoid losing money, Lydon suggests investors hedge by using WisdomTree’s Europe Hedged Equity ETF (HEDJ) and the Deutsche X-Trackers MSCI Japan Hedged Equity ETF (DBJP). Both provide exposure to the country’s equities, while at the same time neutralizing exposure to fluctuations between the value of the U.S. dollar and the euro, according to Yahoo Finance.
This year we have seen the euro and the yen weaken against the U.S. dollar. That has fueled a 9 percent rally in the PowerShares DB US Dollar Bullish ETF (UUP) over the past six months. Many firms, including Goldman Sachs (GS), remain bullish on the dollar through 2015, indicating more upside.
The easiest way to capture further gains is to buy UUP says Lydon. "If all you want to do is currency hedging alone you don’t need to go out and buy options or futures you can do that through an ETF.”
Investors are catching on, assets invested in U.S. exchange-traded funds that hedge currency risk grew 18 percent since September to $21.2 billion, data compiled by Bloomberg show. That’s the biggest quarterly increase since mid-2013.
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