McCall’s Call: Playing The Dollar’s Fall

The Middle East is in upheaval and investors have been running into areas of the market they consider stable and safe. Over the past several decades, the dollar and dollar-denominated assets have been the investments of choice in times of geopolitical unrest and fear; that is, until this past month.

Matthew D. McCall

Since that time, the SPDR S'P 500 ETF (NYSEArca:SPY) is up 4.9
percent through the end of the quarter, including dividends. Many
investors may find it hard to fathom that stocks are up over the
last 13 months, but, until the third quarter, they were performing
quite well.

The U.S. Dollar Index, a benchmark that tracks the performance of the dollar versus a basket of foreign currencies, hit a fresh four-month low this week. It appears the greenback is losing its status as a safe-haven currency among investors. Indeed, the latest move is part of a broader trend that's been in place for about a decade.

In the dollar's place, two very different countries can brag about having safe-haven currencies:Japan and Switzerland. And the following ETFs are just some of a growing number of exchange-traded tools investors now have at their disposal to protect their assets from the U.S. currency's further weakening.

Yen And Swiss Franc

The Rydex CurrencyShares Japanese Yen ETF (NYSEArca:FXY) gained 2.5 percent in the last two weeks, and the Rydex CurrencyShares Swiss Franc ETF (NYSEArca:FXF) did even better, with a 5 percent gain. The Swiss franc is at the highest level in years against the dollar, and the yen isn't far from the same feat.

Not only have the Swiss franc and yen rallied versus the dollar, even the euro and British pound, two currencies that have their own issues, are outperforming the greenback. While the Swiss franc and the yen could be considered safe havens within the currency market, the euro and British pound are outperforming for a different reason.

As the Federal Reserve appears to be OK with the scenario of low interest rates for the foreseeable future-even at the risk of high inflation-European policymakers are suggesting they're going in a different direction. Investors, in turn, are opting to invest in currencies that are linked to countries that will likely raise interest rates before the U.S.; thus, the move into the euro and pound.

Long-Term Downtrend

The U.S. Dollar Index's latest move downward in 2011 is just the latest piece of a long-term downtrend. For the past decade, the overall trend of the dollar versus its peers has been lower, as presidential administrations in Washington, D.C. have quietly let the currency fall. The index hit a high of 121 in July 2001 and is currently trading near 77-a drop of 36 percent in just under 10 years.

As far as the government and Fed are concerned, regardless what they may say about a "strong dollar" policy, the proof is in the numbers. And if the U.S. is to meet President Obama's goal of doubling exports in the next five years, it must keep the value of the dollar down. A strong dollar will result is less buying power for the foreign nations that are responsible for buying U.S. exports.

Playing The Weak Dollar With ETFs

If you agree with me that the dollar will continue to weaken in the months and years ahead, you have a few options in the world of ETFs to profit from the trend.

The ETF that will give you the most direct exposure to a falling greenback is the PowerShares DB US Dollar Bearish ETF (NYSEArca:UDN), which replicates the movement of being short a basket of dollar futures versus six foreign currencies. The ETF charges a management fee of 0.75 percent.

As the greenback has been falling, other winners have included currencies that are linked to commodity-producing countries. An ETF to play this trend, the WisdomTree Dreyfus Commodity Currency ETF (NYSEArca:CCX), came to market in September 2010. The ETF gives investors exposure to countries such as Russia, Brazil and Norway. By investing in foreign-government debt via money markets allows investors to benefit from higher yields as well as currency appreciation.

WisdomTree also offers the Dreyfus Currency Income ETF (NYSEArca:CEW) that invests in a basket of 12 equally weighted emerging market currencies that includes countries from five different continents. Both of these WisdomTree ETFs charge management fees of 0.55 percent.

No Guarantee

Now is the time to determine which ETF is the most appropriate to protect your portfolio from the weak dollar trend. Even if the dollar continues its trend lower, there's no guarantee that all foreign currencies will rise against the greenback.

Therefore a broad-based currency ETF is attractive when compared with single-currency ETFs as far as risk is concerned. Ideally, investors can build a portfolio with a combination of both to increase profits without increasing risk. On the flip side, if I'm wrong and the dollar begins to strengthen, expect the majority of foreign currencies to fall in value with diversified as well as single-country foreign currency ETFs joining the sell-off.

As always, the key to investing in any sector is to watch the trend of the investment-in this case currencies-and have a plan in place in the event the original thesis is incorrect.

Matthew D. McCall is editor of The ETF Bulletin andpresident of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.

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Copyright ® 2011 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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