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U.S. Dollar to Remain Weak in 2021? ETFs to Gain

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This has been a rough year for the greenback on an overall basis with Invesco DB US Dollar Index Bullish Fund (UUP) losing about 5.9%. The start of the year was bullish for the reserve currency as acute demand for cash amid the coronavirus crisis boosted the greenback’s safe-haven appeal.

However, a super-dovish Fed first marred the demand for the dollar and the risk-on sentiments powered by fiscal stimulus and vaccine hopes pulled down the currency’s value. This has put the greenback on the  track for its weakest year since 2017.

Investors are expecting a weakening dollar ahead. Over two-thirds of analysts in a recent Reuters poll expect the greenback to remain depressed until at least mid-2021, as investors are moving toward riskier assets and looking for higher yields.Analysts at Societe Generale have pushed the dollar’s weighting in their multi-asset portfolio to a record low.

Asset managers have increased their short bets on the U.S. dollar to record levels. The dollar has declined against the major peer currencies in seven of the first 11 months of the year, according to the Bloomberg Dollar Spot Index. In fact, it underperformed the two other safe-haven counterparts Swiss Franc and Yen. Even euro and Australian dollar too have outperformed the greenback this year (read: The Best Currency ETF of 2020 Will Surprise You).

What’s in Store in 2021?

We expect the U.S. dollar to remain under pressure in the beginning of 2021 when more vaccine updates from various pharma companies will likely be assessed. Global stocks were super steady in November on back-to-back upbeat vaccine update from pharma companies like Pfizer, Moderna and AstraZeneca.

Plus, Sanofi (SNY - Free Report) , GlaxoSmithKline's (GSK - Free Report) and Johnson & Johnson (JNJ) are also working hard in the COVID-19 vaccine field and may come up with good news next year. This raised hopes of a return to normalcy sooner than expected and may prolong dollar weakness.

Lawmakers in Washington initially failed to reach an agreement on the extension of economic stimulus to fight the COVID-19 crisis, but there has been a $900 billion bipartisan proposal lately.  The Chinese yuan has lately been gaining credibility as a safe haven from volatility.

Lack of trade tensions under the upcoming Biden presidency should benefit the Chinese yuan. Recently, OECD said that the upcoming economic recovery would vary across the countries. The agency also added that China is expected to make up more than one-third of global growth in 2021.

Against this backdrop, below we highlight ETFs and stocks that should gain from a likely dollar weakness in 2021.

ETFs in Focus

Large-caps – SPDR S&P 500 ETF Trust (SPY)

Since large-cap stocks have greater foreign exposure, the weakening dollar is great for this capitalization.BofA Global Research estimates that every 10% drop in the U.S. dollar translates to about a 3% boost to S&P earnings, as quoted on Reuters.

Moreover, the S&P 500 has a tendency to rise an average of about 22% following years when the broad trade-weighted dollar - which measures the U.S. currency against those of the country’s major trading partners – fell between zero and 3%, according to research from Bespoke Investment Group, a Reuters article indicated.

Commodities – Invesco DB Commodity Index Tracking Fund (DBC - Free Report)

The decline in the dollar is good for raw materials and commodities as these are priced in the U.S. dollar. Moreover, “periods of dollar weakness tend to coincide with greater growth” (per Jeroen Blokland, portfolio manager at asset manager Robeco), which in turn benefits commodities. The S&P/Goldman Sachs Commodity Index is up about 74% since late April, driven by gains in everything from oil to gold, as quoted on Reuters.

TIPS – iShares TIPS Bond ETF (TIP - Free Report)

A weaker currency would translate into a reflationary environment. This, in turn, should prove to be gainful for TIPS ETFs like TIP.

Emerging Markets – iShares MSCI Emerging Markets ETF (EEM - Free Report)

Emerging markets also tend to do well in a falling dollar environment, making it easier for countries that have borrowings in the dollar to service their debt. Plus, investors may want to tap the high-yielding emerging markets ETFs like EEM.

Inverse-dollar – Invesco DB US Dollar Index Bearish ETF (UDN - Free Report)

The fund offers exposure to the Deutsche Bank Short USD Currency Portfolio Index - Excess Return, which is a rules-based index and composed solely of short U.S. Dollar Index futures contracts that trade on the ICE futures exchange.

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