Time For An Active Long/Short Dollar ETF

February 12, 2015

The Case For A Long/Short Dollar ETF

One of the panelists pointed out that we’re in a global currency war. Not intentionally, but as a byproduct of central banks attempting to stimulate their economies in the face of little to no fiscal help from their respective governments.

This makes other central banks intervene to keep a lid on their currencies from appreciating out of control. And as we witnessed when the SNB flip-flopped on its policy in early January, we can be blind-sided by volatility overnight.

The market consensus is calling for the Federal Reserve to begin raising rates in the summer or fall of 2015. But the U.S. dollar has already surged above levels not seen since the 2008 financial crisis against some currencies.

Euro-Dollar Parity?

I’m now hearing calls for the euro to hit parity with the dollar. That could certainly happen, but that’s also assuming the Federal Reserve will sit back and allow that to happen.

I question just how much the Federal Reserve can “tighten” and normalize rates in such a surging dollar environment just when most developed central banks are easing as developed markets are mired in deflationary pressures.

Warren Buffett recently addressed this issue, going so far as saying the Federal Reserve should put off raising rates in the current strong dollar environment, so as not to choke off exports and growth.

What if for some reason the Fed decides to become less hawkish than expected? What will that do to commodity prices and currencies of commodity-producing countries that have been pummeled?

I don’t have a clue what the Fed will do. But I’m not sure I’d want to be fully long the dollar against all currencies, either.

Even the yen seems to have found a floor, if only temporary, at around 120 yen/dollar after the Bank of Japan surprised with additional stimulus in late October. Still, paradoxically, the yen tends to rise when Abenomics loses steam or the risk-off trade comes back into vogue.

Clearly, the biggest uncertainty with actively managed funds is that you’re putting your faith into a manager’s ability to select the right currency pairs. But in today’s fast-changing currency environment, it’s hard to be fully bearish or bullish on the U.S. dollar.

With so many forces at play, I think there’s a case to be made for an absolute-return currency ETF.

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.

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