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Worried About a Weak Dollar? Here's How to Trade & Win

Sanghamitra Saha

Despite a super-dovish Fed, the greenback gained at the onset of the coronavirus contagion due to strong demand for safe-haven assets and a worldwide cash crunch. Now that the virus outlook has improved and many global economies have reopened (along with 50 U.S. states), risk-on sentiments are gradually returning and the U.S. dollar is losing.

Moreover, the ultra-easy Fed policy is posing another threat to the currency. Dollar bullion ETF Invesco DB US Dollar Index Bullish Fund UUP has retreated about 4% past month (as of Jun 10, 2020). Jeffrey Gundlach, the billionaire chief executive of DoubleLine Capital, believes that the U.S. dollar is unlikely to gain ahead in the near term because of the widening budget deficit.

Gundlach noted the inverse correlation between the dollar and the twin deficit — the U.S. deficit plus the trade deficit — which has jumped dramatically because of the government’s stimulus efforts to fight the impact of the coronavirus-led lockdown, would result in pain in the greenback ahead. Gundlach sees “the dollar going all the way back to 2011 levels.”

Goldman Sachs also believes the “steady reopening process, limited evidence of a pickup in Covid [COVID-19] infection rates, and encouraging policy actions like progress on the EU Recovery Fund” is leading the investment house to bet against the greenback.

Investing Strategies to Follow

So, investors looking to play further weakness in the U.S. dollar could consider the below-mentioned strategies:

Inverse Dollar

The product Invesco DB US Dollar Index Bearish Fund (UDNseeks to track changes, whether positive or negative, in the level of the Deutsche Bank Short USD Currency Portfolio Index - Excess Return (DB Short USD Currency Portfolio Index ER) plus the interest income from the fund's holdings of primarily U.S. Treasury securities and money market income less the Fund's expenses. The fund has gained 4% past month.

Large-Cap Stocks

Since large caps have global exposure and benefit from the weakening of the greenback, investors may expect favorable currency translation to boost their earnings. Some U.S. companies generate considerable revenues abroad. These companies include Zacks Rank #3 (Hold) Texas Instruments TXN, Yum! Brands, Inc. YUM and The Procter & Gamble Company PG, and Zacks Rank #2 (Buy) Apple Inc. AAPL.

Metal & Mining

While the reopening of economies boosted manufacturing activities thus benefiting base metal prices, a still-edgy investing backdrop would continue to favor precious metal gold prices too. Metal investing is great in a weaker dollar environment as these commodities are priced in the greenback.

If metal prices gain, the related mining companies would benefit too. Investors can play Zacks Rank #3 gold mining company Newmont Corporation NEM, Zacks Rank #1 (Strong Buy) molybdenum mineral exploration and development company General Moly Inc GMO, and Zacks Rank #2 Wheaton Precious Metals Corp. WPM. Zacks Rank #3 BHP Group Limited BHP, which is one of the world's largest diversified resource companies, can be given a look.

Europe Stocks & Currency

The European Commission recently unveiled a plan to borrow 750 billion euros on the market and then disburse to EU countries, which will include 500 billion euros in grants and 250 billion euros in loans. Plus, the ECB also expanded and extended the pandemic stimulus. The move helped the euro to gain. Overall, Invesco CurrencyShares Euro Currency Trust (FXEhas added 4.5% past month.

While large-cap Europe stocks would gain on stimulus optimism, small-cap ones should benefit more. A stronger euro would make pint-sized European stocks a lucrative bet. In this regard, investors can take a look at small-cap automotive firm Adient PLC (ADNT) (Zacks Rank #2), biotechnology companies like Adaptimmune Therapeutics Plc ADAP (Zacks Rank #2) and Myovant Sciences Ltd. MYOV (Zacks Rank #3), and at software firm Talend S.A. TLND (Zacks Rank #3).

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Apple Inc. (AAPL) : Free Stock Analysis Report
BHP Group Limited (BHP) : Free Stock Analysis Report
Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
Procter Gamble Company The (PG) : Free Stock Analysis Report
Yum Brands, Inc. (YUM) : Free Stock Analysis Report
Newmont Corporation (NEM) : Free Stock Analysis Report
Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
General Moly, Inc (GMO) : Free Stock Analysis Report
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
Adaptimmune Therapeutics PLC (ADAP) : Free Stock Analysis Report
Invesco DB US Dollar Index Bearish ETF (UDN): ETF Research Reports
Talend S.A. (TLND) : Free Stock Analysis Report
Adient PLC (ADNT) : Free Stock Analysis Report
Myovant Sciences Ltd. (MYOV) : Free Stock Analysis Report
Wheaton Precious Metals Corp. (WPM) : Free Stock Analysis Report
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