One of the most popular ETF trades of the year—buying the WisdomTree Europe Hedged Equity ETF (HEDJ | B-55)—is now turning south as the dollar rally has hit a major snag. But so far, investors remain committed to the trade, and continue pouring assets into the fund, and others like it.
In the past week, HEDJ slipped 3.4 percent as the dollar rally lost steam. Another hugely popular ETF, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF | B-73), also gave up ground.
The greenback declined about3 percent in a week on concerns that the period of unusually low rates in the U.S. will persist longer than expected. Indeed, on Wednesday the Federal Reserve reiterated that it is in no rush to raise rates as it frets over the U.S. economy’s ability to grow all on its own.
Much of the dollar strength this year has hinged on the fact that the U.S. is about to increase rates when countries around the world are all doing the opposite—embarking on periods of monetary easing.
Global Race To Debase
Bloomberg reported that 20 central banks around the globe have lowered rates this year as they look to spark growth in their respective regions.
“The dollar-bullish positioning had been extreme, so it was only a question of time when that would change,” Axel Merk, of Merk Investments, told ETF.com. More so, economic surprises have been coming in on the downside in the U.S. while on the upside in Europe.
“Separately, the dollar was rising in a risk-on environment over the past nine months, making it questionable whether the dollar will rally in a risk-off environment, as it ‘should’ happen,” Merk added. “As such, we are dealing with extreme positions in the market and a perfect setup for a short squeeze that gives speculators a good run for their money.”
If you look at the year-to-date performance of long-dollar ETFs such as the PowerShares DB US Dollar Index Bullish ETF (UUP | B-73), which offers inverse exposure to an index of dollar futures contracts that rises in value as the dollar appreciates relative to a basket of world currencies, and the WisdomTree Bloomberg US Dollar Bullish ETF (USDU | 67), you can see the waning momentum of the greenback rally.
USDU is an actively managed ETF that goes long the U.S. dollar against a basket of global currencies from developed as well as emerging markets.