Not that long ago, many so-called experts, pundits, and
traders speculated that the U.S. dollar would lose its reserve
currency status. The dollar appeared to be on its way to more
declines against its major rivals amid the loss of the
prestigious AAA credit rating, rising deficits, and no legitimate
plans to deal with entitlement spending.
The combination of gold losing its safe haven status, Japan
being in perhaps a worse fiscal situation than the U.S., and
Europe's worsening sovereign debt crisis have helped resurrect
the dollar, bolstering its reserve currency status in the
A strong dollar has its advantages, particularly for consumers
and tourists that are traveling internationally. Conversely, a
rejuvenated greenback also claims plenty of victims in the
financial markets. With the dollar
looking poised to extend
its bull run, some ETFs could be in more for pain at the hands of
King Dollar. What's really important is that we're talking about
more than just gold and oil funds.
Consumer Discretionary SPDR (NYSE:
The Consumer Discretionary SPDR would be a viable alternative, as
an ETF that can stave the impact of a stronger dollar if the U.S.
economy can really gain steam. That's a big "if," though. Half of
XLY's top-10 holdings can easily be adversely affected by a
), the ETF's largest holding, is facing
the double whammy
of slowing global sales and a stronger buck. Walt Disney (NYSE:
), Starbucks (NASDAQ:
), Ford (NYSE:
), and Nike (NYSE:
) all have some degree of currency risk. These five stocks
account for 22% of XLY's weight.
As if that's not bad enough, XLY has smaller weights to
high-end discretionary names such as Ralph Lauren (NYSE:
), Coach (NYSE:
), and Tiffany & Co. (NYSE:
) that are vulnerable to a slowing global economy and a stronger
iShares MSCI Canada Index Fund (NYSE:
This is a perception play. Canada is the largest exporter of
oil to the U.S., but energy stocks aren't the largest sector
allocation in EWC. Financials are - but energy names are
prominent at 26.3% of Canada's largest fund's overall weight.
Regarding the greenback and the loonie (the Canadian dollar), the
inverse correlation has been almost perfect in the past month.
UUP is 2.43%, while the CurrencyShares Canadian Dollar Trust
) is down 2.49%. Over the same time, EWC has dropped 4.4%.
Market Vectors Brazil Small Cap ETF (NYSE:
With the WisdomTree Dreyfus Brazilian Real ETF (NYSE:
) down almost 5% in the past month, nearly any ETF tracking the
export-driven Brazil would be suitable for this list. The U.S. is
Brazil's second-largest trading partner behind China; so, in
theory, the weaker real should be helping Brazil ETFs.
That hasn't been the case, as the plunging real has weighed on
BRF - 47% of its fund is allocated to discretionary and
industrial names. Traders have shown that when they deport exotic
currencies such as the real, they head to the dollar. Short
real/long dollar is a problem for Brazil equity funds. It's that
Materials Select Sector SPDR (NYSE:
Materials stocks are an obvious strong dollar victim. XLB's
constituents are primarily American companies, but they garner
healthy revenue percentages overseas. In other words - a weak
dollar is a catalyst for materials stocks, just as it is for the
futures prices of many of the commodities that these companies
With Freeport McMoRan Copper & Gold (NYSE:
) and Newmont Mining (NYSE:
) among its top-10 holdings, metals and mining names account for
almost 23% of XLB's weight. That's enough enough to validate XLB
as a strong dollar play... from the short side.
For more on ETFs with ties to the U.S. dollar, please click
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