Recently, the US dollar has drawn much attention as it has rebounded from a one-year low against the euro, its volatility has influenced commodity prices and a carry trade in the currency has emerged.
The Federal Open Market Committee (FOMC) has acknowledged that the US economy is emerging from a prolonged recession, however, at the same time the Federal Reserve has announced that it will maintain its near-zero interest rate into 2010. This low interest rate, in conjunction with the dollar’s price levels and its easiness to borrow make it the perfect funding currency for carry trades.
Carry trades are when investors borrow a currency at negligible interest rates to invest in higher yielding currencies, and this can be detrimental to the currency being borrowed – in this case the dollar.
The dollar also faces downward pressure as investors’ risk appetite increases. As the global economy is slowly emerging out of a recession, many investors are starting to put their money into riskier investments which offer higher yields and take their money out of the dollar, which has traditionally been known as a safe-haven for international investors. Lastly, the dollar has taken a hit by the massive amounts of money that the federal government has printed to bailout and aid the nation out of a recession.
As for the near future, the fundamentals of the dollar remain weak and the overall health of the global economy points to an unfavorable trend for the currency. Whether or not you agree with the bearish case for the dollar, there are several ETF choices for both bears and bulls.
To short the dollar, one can choose the PowerShares DB US Dollar Index Bearish (UDN) and if one thinks that the dollar is going to rally, the PowerShares DB US Dollar Index Bullish (UUP) is a good play. To get a bit more creative, one can consider the PowerShares DB G10 Currency Harvest (DBV), which holds long futures contracts on the three G10 currencies associated with the highest interest rates and short futures contracts on the three G10 currencies with the lowest interest rates.
