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Strong USD Forces Down Emerging Market ETFs


Federal Reserve interest rate expectations and a strong U.S. dollar are wreaking havoc on the emerging markets and related exchange traded funds.

ETFs that track the emerging markets, notably those that cover Brazil, emerging currencies and developing market debt, touched fresh all-time lows Tuesday, including the iShares MSCI Brazil Capped ETF (EWZ) , WisdomTree Emerging Currency Strategy Fund (CEW) and SPDR Barclays Emerging Markets Local Bond ETF (EBND) .

Emerging market equities have been pummeled over the past week, with the iShares MSCI Emerging Markets ETF (EEM) down 3.9% and the Vanguard FTSE Emerging Markets ETF (VWO) 4.2% lower.

Weighing on the emerging markets space, the U.S. dollar has been slowly appreciating against a basket of foreign currencies on the prospect of a higher U.S. interest rate, reports Patti Domm for CNBC.

“Emerging markets have generally required four things: one, a weak dollar; second, strong commodities prices; third, strong world growth; and the fourth thing is about Fed policy,” Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman, said in the article.

However, the world economy has been slowing, commodity prices have declined, the USD is only at the start of its strengthening cycle and the Fed is thinking about tightening its monetary policy. [Mind Your Global ETF’s Currency Exposure]

“If you look internationally, there’s havoc, and the havoc is that the dollar is moving so aggressively that it is going to cause, not turmoil, but actual wreckage, in a lot of funds that have money in some of these emerging markets. I think the logical place to look is Brazil,” Jim Cramer said on CNBC.

For instance, the WisdomTree Brazilian Real ETF (BZF) is the worst performing currency ETF this year, falling 13.5% year-to-date. [Things are Unbelievably Bad for Brazil ETFs]

On the other hand, more aggressive traders can capitalize on the weakness in Brazil through inverse or bearish ETF plays. For instance, the ProShares UltraShort MSCI Brazil Capped (BZQ) , which takes the -2x or -200% daily performance of the MSCI Brazil 25/50 Index, has increased 31.7% year-to-date.

For more information on the developing economies, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.