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Dollar Strength Reveals Merits of Currency Hedged ETFs

This article was originally published on ETFTrends.com.

As the U.S. dollar pushes higher, investors who are looking into international market and related stock exchange traded funds should consider hedging foreign exchange currency risks.

The U.S. dollar hit fresh 2018 highs Tuesday, with the U.S. Dollar Index now hovering around 93.1, on safe-haven demand amid expectations President Donald Trump will exit Iran nuclear deal talks and reinstate sanctions.

The dollar index, which tracks the USD's movement against a group of six major currencies, also has strengthened 4.5% in three weeks after other major central banks did not show any hints of following the Federal Reserve in normalizing their monetary policies.

“The dollar reflects the incremental economic strength of the U.S. versus Europe and other places,” Jack Ablin, chief investment officer and founding partner at Cresset Wealth Advisors, told Reuters. “The dollar is somewhat undervalued relative to the euro and the pound but it is very overvalued relative to the Japan yen.”

Europe, Japan and Emerging Markets

Despite the forex risks, many are still looking into international plays. For example, Deutsche Bank has been overweight Europe, Japan and the emerging markets.

"It is still an international theme," Robert Bush, ETF Strategist for DWS, told ETF Trends.

However, Bush warned of potential currency risks ahead. For example, Bush said Deutsche projects the euro currency to weaken to $1.15 - the euro is currently hovering around $1.19.

As ETF investors seek international exposure to diversify their equity portfolio and potentially tap into more attractive plays abroad, traders should consider currency-hedged strategies that allow investors to capture upside potential in the global markets while hedging against potentially weakening international currencies or a stronger U.S. dollar.

For instance, the depreciating JPY has allowed currency-hedged Japan ETFs to outperform their non-hedged peers. For instance, the WisdomTree Japan Hedged Equity Fund (DXJ) , iShares Currency Hedged MSCI Japan ETF (HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks. As the dollar strengthened against the yen currency over the past month, DXJ gained 3.6%, HEWJ rose 4.0% and increased 4.0% while the non-hedged benchmark MSCI Japan Index was 1.3% higher.

Meanwhile, investors who believed the euro currency could weaken after its recent rally and are bullish on the broader Eurozone turned to the Deutsche X-trackers MSCI EMU Hedged Equity ETF (DBEZ) , iShares Currency Hedged MSCI EMU ETF (HEZU) and WisdomTree Europe Hedged Equity Fund (HEDJ) . In the past month as the USD appreciated against the EUR, DBEZ jumped 6.0%, HEZU surged 5.4% and advanced 4.7% while the non-hedged benchmark MSCI EMU Index added 2.0%.

For more information on currency-hedged strategies, visit our currency hedged ETFs category.