ETF Plays For A Surging Greenback

By Aaron Levitt | September 02, 2014 AAA

Before the Great Recession, everyone thought the dollars days were numbered. The Euro and various emerging market currencies were all the rage and the greenback continued to sink versus these other currencies. Funds like the WisdomTree Emerging Currency Strategy (NYSE:CEW) sprang up and attracted big inflows.

Well, investors may not want to give up on the dollar just yet.

Despite a potentially sticky long-term situation, the dollar is quickly emerging as one of the biggest stars in the New Year. And given some pretty bullish factors, those gains could continue. For investors, the time to bet on the greenback could be now.

Highest Gain In Months  

While once potentially “left for dead” as the premier currency, Uncle Sam is having the last laugh. The U.S. dollar recently hit fresh highs as well as saw its biggest one day gain in almost five months against a basket of other developed market currencies.

The reason? The U.S. economy is rocking once again as recent positive data is lending support to the dollar.

Factory activity in the U.S. recently rose to a 2 ½ year high and the number of unemployed Americans continues to drop. Meanwhile, both commercial and housing construction starts have been rising and the dour U.S consumer has finally begun to spend. The latest Consumer Confidence Index numbers climbed to 78.1 in December from a revised 72 in November. That’s the best year end number since 2007. All in all, these positive suggest that the world's largest economy was finally on stable footing. 

These positive factors have helped the greenback pop over the last few quarters. And the good times could still carry on for the currency.

The positives in the U.S. economy should help the Fed begin winding down its quantitative easing programs throughout the year. That’s should help boost U.S. treasuries and ultimately, the U.S. balance sheet. A stronger balance sheet supports a strong currency. Also boosting that balance sheet is the recent bipartisan budget deal in Washington that calls for small spending decreases. Adding in the continued gains for the U.S. economy and you have recipe for a higher greenback in 2014.

According to Bloomberg, analysts expect the dollar to gain nearly 8% against the euro by 2015. Similarly, the Japanese yen will fall against the dollar buy roughly the same amount. 

A Greenback Portfolio

With the dollar expected to rise throughout 2014, investors may want to position themselves accordingly. The most popular and easiest way to do that is through the PowerShares DB US Dollar Index Bullish (NYSE:UUP).

The UUP tracks the value of the U.S. dollar relative to a basket of the six major world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The ETF accomplishes this by spreading it’s nearly $691 million in assets by going long the dollar via futures contracts on the currencies. So far, UUP has been roughly flat since inception, but if the dollar continues to rise, the fund should do well. Expenses for UUP run 0.80% and investors should get a K-1 statement come tax time. 

Another option, could be the new WisdomTree Bloomberg USD Bullish (NASDAQ:USDU). The kicker for this new fund is that in addition to the currencies in UUP, the WisdomTree (NASDAQ:WETF) fund adds exposure to the Mexican Peso, Australian dollar, South Korean Won, Chinese Yuan and Brazilian Real.

Another option could be to actually short various currencies versus the dollar. The ProShares UltraShort Euro (NYSE:EUO) measures twice the decline of the euro versus the U.S. dollar and makes an easy play for the greenbacks uptrend. Likewise, investors can short funds like CurrencyShares Canadian Dollar Trust (NYSE:FXC) and CurrencyShares Australian Dollar Trust (NYSE:FXA). Both are highly liquid and borrowing shares is relatively easy at most brokerages.

Finally, a rising dollar is a boon to those nations with export driven economies- such as Germany and Japan. As the dollar rises, their goods essentially get cheaper in real terms. That makes funds like the iShares MSCI Germany (NYSE:EWG) and iShares MSCI Japan (NYSE:EWJ) big buys. Both funds track some of the world’s largest multinational exporters like Siemens (NYSE:SI) and Toyota Motor (NYSE:TM).

The Bottom Line

After years of declines, the U.S. dollar has regained its mojo. More importantly, those gains should continue throughout the New Year as various factors continue to push it upwards. For investors, the time is still right to bet on the greenback. The previous picks- along with the actively managed PIMCO Foreign Currency Strategy ETF (NASDAQ:FORX) -make ideal selections to play the trend.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

comments powered by Disqus
Related Analysis
  1. Rise Of The Greenback
    Stock Analysis

    Rise Of The Greenback

  2. Playing The Greenback With ETFs
    Stock Analysis

    Playing The Greenback With ETFs

  3. Is Canada’s Lagging Energy Sector A Good Bet?
    Stock Analysis

    Is Canada’s Lagging Energy Sector A Good Bet?

  4. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  5. Is Trouble Ahead for Auto Industry Stocks?  - Industry Outlook
    Stock Analysis

    Is Trouble Ahead for Auto Industry Stocks? - Industry Outlook

Trading Center