FXE is the tip of the enticing iceberg of currency ETFs now on the market.
The first half of 2011 has been a rollercoaster ride for currency markets as investors digest news from the U.S and abroad regarding budgets and possible defaults.
The big news in the U.S. has to do with the current debt ceiling and whether the government will raise the current level or begin a move to austerity. And, across the Atlantic, concerns about debt defaults that began in Greece have now spread to Ireland, Spain and most recently, Italy.
Worries about Europe’s economic health has put downward pressure on the euro and boosted the dollar. However, on days when the bigger concern is the U.S. deficit, it’s the dollar that falls and the euro that rises.
While you can play ETFs like the Rydex CurrencyShares Euro Trust ETF (NYSEArca: FXE) to get a piece of the dollar-euro cross, I’m here to tell you there are plenty of other currency ETFs that can help diversify a portfolio that have nothing to do with this trans-Atlantic dynamic.
So, let’s take a look at FXE and some of the other ETFs that allow you to play currencies ranging from the Swiss franc, to the Japanese yen, to the New Zealand dollar, to those from the emerging markets.
Euro And Dollar
The recent focus on eurozone and possible default issues with several countries has put extreme pressure on FXE following a pretty good run.
It reached an 18-month high in May before the news regarding Greece and other eurozone countries began to worsen. This week, FXE is trading near a four-month low as Italy joins the conversation of nations in trouble.
With FXE falling, the PowerShares DB US Dollar Index Bullish ETF (NYSEArca: UUP) has been rising and is trading at its highest level in six weeks.
That said, I still think the deeper trend for the US Dollar Index and UUP remains bearish. This theory is based on the long-term trend of the US Dollar Index and the fact the U.S. government is OK with a weak currency because it makes U.S. exports cheaper.
Last year, President Obama stated his intentions to double exports in the next five years, and the only possible way to achieve this goal is with a weak currency.
Another factor would be the possibility of a third round of so-called quantitative easing, which would put more pressure on the greenback.
In that context, I believe UUP’s recent bounce has to do with the fact the news out of Europe is worse than what’s coming out of the U.S. as Congress grapples with how to raise the debt ceiling while laying the groundwork for a healthier longer-term fiscal situation.
In other words, the dollar just happens to be the best of the worst at the moment.
So, if concerns about Italy subside, the euro is likely to spike and UUP will resume what I consider to be its secular downtrend. On the other hand, if Italy requires a bailout, the exact opposite could occur.