When it comes to the currency market there are two "big guys" that are often viewed as barometers. The U.S. dollar and the euro are the currency of the two most influential regions in the world today, and both have their issues that they must face in the future.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The euro has more than enough well-documented problems, starting with Greece and moving onto countries like Spain, Italy and Ireland. There has been talk that the euro may not even be in existence in the years ahead, if the problems in the region are not resolved quickly. The CurrencyShares euro ETF (ARCA:FXE) is down 12% from its multi-year high set in May 2011.

During the same timeframe, the PowerShares DB U.S. Dollar Bullish ETF (ARCA:UUP) is up 6%, easily outpacing its european counterpart. With that being said, the ETF is down nearly 20% from its recent high set in October 2008. My outlook for the greenback is not positive, considering the amount of overtime the printing presses have been putting in. Eventually, the influx of new currency will push the U.S. dollar back to a new low.

In the last few years, both the U.S. dollar and the euro have been trending in the wrong direction. The trend, along with the reasons mentioned above, is why I am looking at emerging market currencies as alternatives. And there is one more very important factor. As the developed countries struggle with rising debt levels, the majority of emerging markets are better positioned with lower debt-to-GDP ratios. (For related reading, see An Inside Look At ETF Construction.)

Broad Currency
The WisdomTree Dreyfus Currency Income ETF (ARCA:CEW) is composed of 12 foreign currencies that each account for about 8% of the allocation. The regional breakdown is: Asia (41%), Latin America (25%), and Europe, the Middle East and Africa (34%). The distribution yield on the ETF is 5% and the ETF is down 6% from the time the euro topped out last May.

The WisdomTree Dreyfus Commodity Currency ETF (ARCA:CCX) is composed of currencies from a basket of commodity-producing countries. Only half of the eight currencies are considered emerging markets, but it is an ETF worth mentioning. The four emerging markets (South Africa, Brazil, Chile and Russia) give investors an interesting mix of currencies. The embedded income yield is 3.8% and the ETF charges an expense ratio of 0.55%. The ETF is down 4.5% from last May.

Single Currency
A currency that has been in the headlines, and will likely stay there for the foreseeable future, is the Chinese Yuan. Most people believe the Chinese are holding down their currency versus the U.S. dollar and this has caused tension between the two countries. If the Chinese ever decide to let their currency float freely, it will likely result in higher prices for the Yuan. The Market Vectors Renminbi (ARCA:CNY) would be a way to play that scenario. The ETN does not move much due to the situation in China, and therefore is only up 1% since last May.

One of the other darling emerging market countries, Brazil, has seen its currency fall from its high, as the U.S. dollar has performed well since last year. The WisdomTree Dreyfus Brazil Real ETF (ARCA:BZF) is down 3.5% from May 2011, but in the last two months it has begun a major turn for the better. The outlook for Brazil's economy remains stable and better than many of its developed counterparts. The Real could be a less aggressive way to play the rise in Brazil.

The Bottom Line
If the european union falls apart, it will likely lead to a higher U.S. dollar that could hurt the emerging market currencies. There is also the potential of a global economic slowdown that would lead to the emerging market countries getting hit hard. As with every investment there is risk, however there is reward attached to the ideas above as well as diversification against a heavily weighted equity. (For more, see How To Pick The Best ETF.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center