The U.S. dollar dropped to a four-week low against other major currencies on Apr 15 as U.S. Treasury yields moderated, with investors increasingly betting on the fact the Federal Reserve will keep interest rates at the rock-bottom levels in the near term.
Most importantly, despite the upbeat economic data, U.S. benchmark treasury yields dropped to 1.56% at the close on Apr 15 from 1.64% recorded the day earlier. The yield is now down from the month’s closing high of 1.73%.
This is especially true given the fact that the U.S. inflation in March came in strong, but not sturdy enough to modify the Federal Reserve’s easy money policy, per market experts. Annual inflation rate in the United States rose to 2.6% in March 2021 from 1.7% in the previous month and slightly above market forecasts of 2.5%.
ETFs to Buy
So, investors looking to play the likely weakness in the U.S. dollar could consider the below-mentioned ETFs:
Inverse Dollar
The product Invesco DB US Dollar Index Bearish Fund UDN seeks to track changes, whether positive or negative, in the level of the Deutsche Bank (DE:DBKGn) 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 gained 1.4% in the past five days (as of Apr 14, 2021).
Large Caps
Since large caps have global exposure and benefit from the weakening of the greenback, investors may expect favorable currency translation to boost their earnings. Large-cap SPDR S&P 500 ETF Trust SPY added 0.7% past week.
Metal ETFs
While reopening of economies would boost manufacturing activities thus benefiting base metal ETFs, 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.
Investors can thus expect a pickup in Invesco DB Base Metals Fund DBB (up 0.3% in the past five days) and SPDR Gold Trust (P:GLD) GLD (up 0.7% past week). Silver could also be a winning option as it acts both as a precious and an industrial metal. Silver bullion ETF iShares Silver Trust (NYSE:SLV) SLV added 1.2% in the past five days.
Non-Currency-Hedged Europe ETFs
The European Commission’s stimulus, ECB’s easy money policy, vaccination and cheaper valuation should favor Europe ETFs. However, with the greenback being subdued and the euro gaining (Invesco CurrencyShares Euro Currency Trust FXE added 0.8% past week), playing non-currency-hedged large-cap Europe ETFs would be a great idea. Vanguard FTSE Europe ETF VGK is one such bet. VGK is up 0.3% past week.
TIPS Bonds
A weaker currency would translate into a reflationary environment. This, in turn, should prove to be gainful for TIPS ETFs like iShares TIPS Bond ETF TIP.TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world.
These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on increasing with rising consumer prices. The fund is up 0.2% in the past five days (read: 4 ETFs to Play Rising Inflationary Pressures).
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SPDR Gold Shares (NYSE:GLD): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares Silver Trust (SLV): ETF Research Reports
Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
iShares TIPS Bond ETF (TIP): ETF Research Reports
Invesco DB US Dollar Index Bearish ETF (UDN): ETF Research Reports
Invesco DB Base Metals ETF (DBB): ETF Research Reports
Vanguard FTSE Europe ETF (VGK): ETF Research Reports
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