McCall’s Call: Playing The Dollar’s Fall

March 02, 2011

A slew of ETFs can keep investors from stumbling as the dollar falls.


The Middle East is in upheaval and investors have been running into areas of the market they consider stable and safe. Over the past several decades, the dollar and dollar-denominated assets have been the investments of choice in times of geopolitical unrest and fear; that is, until this past month.

Matthew D. McCallThe U.S. Dollar Index, a benchmark that tracks the performance of the dollar versus a basket of foreign currencies, hit a fresh four-month low this week. It appears the greenback is losing its status as a safe-haven currency among investors. Indeed, the latest move is part of a broader trend that’s been in place for about a decade.

In the dollar’s place, two very different countries can brag about having safe-haven currencies: Japan and Switzerland. And the following ETFs are just some of a growing number of exchange-traded tools investors now have at their disposal to protect their assets from the U.S. currency’s further weakening.

Yen And Swiss Franc

The Rydex CurrencyShares Japanese Yen ETF (NYSEArca: FXY) gained 2.5 percent in the last two weeks, and the Rydex CurrencyShares Swiss Franc ETF (NYSEArca: FXF) did even better, with a 5 percent gain. The Swiss franc is at the highest level in years against the dollar, and the yen isn’t far from the same feat.

Not only have the Swiss franc and yen rallied versus the dollar, even the euro and British pound, two currencies that have their own issues, are outperforming the greenback. While the Swiss franc and the yen could be considered safe havens within the currency market, the euro and British pound are outperforming for a different reason.

As the Federal Reserve appears to be OK with the scenario of low interest rates for the foreseeable future—even at the risk of high inflation—European policymakers are suggesting they’re going in a different direction. Investors, in turn, are opting to invest in currencies that are linked to countries that will likely raise interest rates before the U.S.; thus, the move into the euro and pound.

Long-Term Downtrend

The U.S. Dollar Index’s latest move downward in 2011 is just the latest piece of a long-term downtrend. For the past decade, the overall trend of the dollar versus its peers has been lower, as presidential administrations in Washington, D.C. have quietly let the currency fall. The index hit a high of 121 in July 2001 and is currently trading near 77—a drop of 36 percent in just under 10 years.

As far as the government and Fed are concerned, regardless what they may say about a “strong dollar” policy, the proof is in the numbers. And if the U.S. is to meet President Obama’s goal of doubling exports in the next five years, it must keep the value of the dollar down. A strong dollar will result is less buying power for the foreign nations that are responsible for buying U.S. exports.


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