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The U.S. dollar strengthened lately versus a basket of major currencies as market watchers are betting big on a Fed taper sooner rather than later despite a surge in COVID-19 cases. Federal Reserve Chair Jerome Powell also said the central bank could start scaling back asset purchases as soon as November and finish the process by mid-2022. Several officials are even interested to hike interest rates next year.
The announcement of the Fed QE taper may come in the policy gathering on Nov 2-3. The fear became stronger given the fact that the European Central Bank (ECB) walked somewhat the same way. The ECB will slow down emergency bond purchases. This would be a step forward for the ECB toward unwinding the emergency aid that has shored up the Euro zone economy during the coronavirus pandemic.
Plus, the spread of the Delta variant of COVID-19 is another concern, which may slow down global growth further. It appears to be a win-win situation for the greenback as the global health crisis has not dissipated yet. This fact provides support to the safe-haven trades. On the other hand, vaccination might reverse the economic slowdown in the United States and take the economy back to a faster growth path, which will boost the country’s currency.
Given the above-mentioned facts, the bullish trend in the greenback is likely to continue, at least in the near term. The U.S. dollar is currently hovering near 14-month high to euro on inflation fears. A surge in energy prices triggered worries about further rise in already high inflation. Notably, a rise in inflation will also encourage the Fed to go for a policy tightening. Investors should note that crude oil rallied to a seven-year high at the current level.
ETFs to Buy
So, investors looking to play the strengthening U.S. dollar could consider the below-mentioned ETFs:
The dollar strength can sure be played with Invesco DB US Dollar Index Bullish ETF UUP and WisdomTree Bloomberg U.S. Dollar Bullish ETF USDU.
Since small caps are closely tied to the U.S. economy and do not get affected by a rising dollar due to their limited foreign exposure, iShares S&P Small-Cap 600 Value ETF IJS could be a good pick. Small-cap investing is more prudent at this time as several U.S. economic data points are decent (if not great) of late.
Dollar-Denominated Bond ETFs
Investors seeking EM exposure amid a strong dollar can consider dollar-denominated EM bond ETFs. These funds invest in sovereign debt from a variety of emerging nations via U.S. dollar-denominated securities. Notably, the debt route is less risky than equities. Moreover, most emerging markets have low debt levels compared to developed countries. iShares J.P. Morgan USD Emerging Markets Bond ETF EMB is one such ETF. The fund yields 3.98% annually.
ETFs to Sell
Inverse Dollar Fund
Needless to say, if dollar rises, a short position on the currency would result in negative returns. Invesco DB US Dollar Index Bearish Fund UDN should thus be avoided.
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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
Invesco DB US Dollar Index Bearish ETF (UDN): ETF Research Reports
iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB): ETF Research Reports
iShares S&P SmallCap 600 Value ETF (IJS): ETF Research Reports
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