Queasy Over U.S. Debt, Fed Policy? New ETF Bets Against the Dollar

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The U.S. dollar is flexing some muscle of late.

The rally against the yen is a function of Japan’s explicit government policy to push down the value of its currency in a bald bid to boost its export competitiveness. The rise against the Euro and British Pound has more to do with the fact that the U.S. economy seems a whole lot less bad than what they are dealing with on the other side of the pond.

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US Dollar to Japanese Yen Exchange Rate Chart

But headlines about the U.S. dollar’s newfound strength are in serious need of some context.

As in, this is a barely perceptible rally amid long-term dollar weakness.

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Real Trade Weighted US Dollar Index: Major Currencies Chart

Some pretty smart money guys are betting the long-term trend persists. The Pimco Foreign Currency Strategy ETF (FORX) launched last month. The strategy is to invest in foreign currencies it expects will appreciate against the U.S. dollar. The Pimco brains have long been lamenting that the onerous U.S. debt and drawn-out accommodative easing policy by the Fed since the financial crisis portends more dollar weakness going forward. This ETF offers a way for investors to hedge against a falling dollar.

As with its successful launch last year of Pimco Total Return ETF (BOND), this ETF is actively managed, a rarity in ETF land. The portfolio managers have imposed a 20% limit for any one currency in their portfolio. Currently, the Canadian Dollar (12% of assets), the Norwegian Krone (12%) and the Russian Ruble (11%) are the three largest currency bets.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.


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