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U.S. Dollar Strengthens in 2020: ETFs to Gain/Lose

Sanghamitra Saha

Despite a dovish Fed, the greenback has been steady in recent trading with about 1% year-to-date gain in Invesco DB US Dollar Index Bullish Fund UUP. The reason for the rally is the U.S. economy’s improved position among developed markets.

U.S. retail sales gained for three successive months in December 2019 and the number of Americans filing claims for unemployment benefits fell for the fifth straight week, hinting at labor market strength. U.S. homebuilding surged to a 13-year high in the month.The Philadelphia Fed’s measure of business activity in its region surged to an eight-month high in January.

Then there was the signing of the U.S.-China phase-one trade deal. Several global equity indexes were at all-time highs. This, in turn, led to a spike in U.S. treasury yields. As a result, the U.S. dollar hit an eight-month high against the yen.

Given the still-weak economic conditions in developed markets, the bullish trend in the greenback is expected to continue, at least in the near term.

ETFs to Buy

So, investors looking to play the strengthening U.S. dollar could consider the below-mentioned ETFs:

Dollar

The dollar strength can sure be played with UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU (read: Top & Flop Currency ETFs of 2019).

Small Caps

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 Russell 2000 Growth ETF (IWOcould be a good pick. Small-cap investing is more prudent at this time as several U.S. economic data points are decent of late (read: 5 Small-Cap ETFs Beating S&P 500 in 2020).

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 4.49% annually.

Currency-Hedged Japan

The global market rally has been weighing on safe-haven asset, Japanese yen. Japan's economic growth is expected to decelerate moderately in 2020, as a combination of consumption tax hike and sluggish global economy may deal a blow to Japanese consumer spending and exports. If this happens, currency-hedged Japan ETFs like WisdomTree Japan Hedged Equity ETF DXJ should do well.

ETF to Sell

Inverse Dollar Fund

Needless to say, if dollar is rising, 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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iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB): ETF Research Reports
 
WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU): ETF Research Reports
 
Invesco DB US Dollar Index Bullish Fund (UUP): ETF Research Reports
 
iShares Russell 2000 Growth ETF (IWO): ETF Research Reports
 
WisdomTree Japan Hedged Equity Fund (DXJ): ETF Research Reports
 
Invesco DB US Dollar Index Bearish Fund (UDN): ETF Research Reports
 
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