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U.S. Dollar Slips to One-Year Low: ETFs to Gain/Lose
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Thanks to cooling inflation and the likelihood of a dovish Fed in the near term, the greenback slipped to a one-year level. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is off 1% this year. Consumer Inflation in the United States cooled down further in March as the consumer price index rose 0.1% in the month, following a 0.4% increase in February. Annual inflation also dropped from 6% to 5%, the smallest annual gain since May 2021, and is now down by almost half from its peak of more than 9% in June last year.
U.S. Producer Price Index (PPI) too recorded the biggest annual decline since January 2021. The Producer Price Index for final demand declined 0.5% in March. The PPI rise of -0.5% in March came in against the expected PPI of 0.1%. On the year-on-year basis, the March PPI inflation increased 2.7%, against the expected rise of 3%. Whereas the year-on-year PPI inflation rise in February was 4.9%.
The significant downside surprise in U.S. PPI has led people to believe that the Fed will soon be done with the policy tightening and may even start to cut rates before the end of the year. Meanwhile, the global health crisis is ebbing. This fact is not helping the U.S. dollar’s safe-haven status either.
Given the above-mentioned facts, the bearish trend in the greenback is likely to continue, at least in the near term.
ETFs to Buy
So, investors looking to play the weakening U.S. dollar could consider the below-mentioned ETFs:
Inverse Dollar Fund
Needless to say, if the dollar is falling, a short position on the currency would result in negative returns. Invesco DB US Dollar Index Bearish Fund (UDN - Free Report) should thus be avoided.
Commodities: Gold
The decline in the dollar is good for raw materials and commodities as these are priced in the U.S. dollar. SPDR Gold Shares (GLD - Free Report) gained 10% this year due to a sudden dollar weakness and the banking crisis in the United States. Having said this, we would like to note that commodities have been strong lately thanks to the war in East Europe and high inflation.
Large Caps
Since large-cap stocks have greater foreign exposure, the weakening dollar is positive for this capitalization. BofA Global Research once estimated that every 10% drop in the U.S. dollar translates into about a 3% boost to S&P earnings, as quoted on Reuters. SPDR S&P 500 ETF Trust (SPY - Free Report) should thus be closely watched.
ETFs to Sell
U.S. Dollar
The dollar weakness can sure be played with UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) .
Small Caps
Since small caps are closely tied to the U.S. economy and do not get affected by a rising dollar due to their limited foreign exposure, iShares Russell 2000 ETF (IWM - Free Report) could be a weak pick now. Moreover, the U.S. regional banking crisis emanating in Mar 2023 may lead small-cap companies to face financing crisis in the days to come.
Dollar-Denominated Bond ETFs
Investors seeking EM exposure amid a falling dollar should not consider dollar-denominated EM bond ETFs. These funds invest in sovereign debt from a variety of emerging nations via U.S. dollar-denominated securities. Notably, the debt route is less risky than equities. Moreover, most emerging markets have low debt levels compared to the developed countries.
SPDR Bloomberg Emerging Markets USD Bond ETF (EMHC - Free Report) is one such ETF. The underlying Bloomberg Emerging USD Bond Core Index measures the performance of fixed-rate US dollar-denominated debt issued by sovereign and quasi-sovereign emerging market issuers. The fund yields 4.88% annually and is up 2.1% this year. On the other hand, local currency bond ETF First Trust Emerging Markets Local Currency Bond ETF (FEMB - Free Report) has advanced about 8.1% this year and yields 5.7% annually.
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U.S. Dollar Slips to One-Year Low: ETFs to Gain/Lose
Thanks to cooling inflation and the likelihood of a dovish Fed in the near term, the greenback slipped to a one-year level. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) is off 1% this year. Consumer Inflation in the United States cooled down further in March as the consumer price index rose 0.1% in the month, following a 0.4% increase in February. Annual inflation also dropped from 6% to 5%, the smallest annual gain since May 2021, and is now down by almost half from its peak of more than 9% in June last year.
U.S. Producer Price Index (PPI) too recorded the biggest annual decline since January 2021. The Producer Price Index for final demand declined 0.5% in March. The PPI rise of -0.5% in March came in against the expected PPI of 0.1%. On the year-on-year basis, the March PPI inflation increased 2.7%, against the expected rise of 3%. Whereas the year-on-year PPI inflation rise in February was 4.9%.
The significant downside surprise in U.S. PPI has led people to believe that the Fed will soon be done with the policy tightening and may even start to cut rates before the end of the year. Meanwhile, the global health crisis is ebbing. This fact is not helping the U.S. dollar’s safe-haven status either.
Given the above-mentioned facts, the bearish trend in the greenback is likely to continue, at least in the near term.
ETFs to Buy
So, investors looking to play the weakening U.S. dollar could consider the below-mentioned ETFs:
Inverse Dollar Fund
Needless to say, if the dollar is falling, a short position on the currency would result in negative returns. Invesco DB US Dollar Index Bearish Fund (UDN - Free Report) should thus be avoided.
Commodities: Gold
The decline in the dollar is good for raw materials and commodities as these are priced in the U.S. dollar. SPDR Gold Shares (GLD - Free Report) gained 10% this year due to a sudden dollar weakness and the banking crisis in the United States. Having said this, we would like to note that commodities have been strong lately thanks to the war in East Europe and high inflation.
Large Caps
Since large-cap stocks have greater foreign exposure, the weakening dollar is positive for this capitalization. BofA Global Research once estimated that every 10% drop in the U.S. dollar translates into about a 3% boost to S&P earnings, as quoted on Reuters. SPDR S&P 500 ETF Trust (SPY - Free Report) should thus be closely watched.
ETFs to Sell
U.S. Dollar
The dollar weakness can sure be played with UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) .
Small Caps
Since small caps are closely tied to the U.S. economy and do not get affected by a rising dollar due to their limited foreign exposure, iShares Russell 2000 ETF (IWM - Free Report) could be a weak pick now. Moreover, the U.S. regional banking crisis emanating in Mar 2023 may lead small-cap companies to face financing crisis in the days to come.
Dollar-Denominated Bond ETFs
Investors seeking EM exposure amid a falling dollar should not consider dollar-denominated EM bond ETFs. These funds invest in sovereign debt from a variety of emerging nations via U.S. dollar-denominated securities. Notably, the debt route is less risky than equities. Moreover, most emerging markets have low debt levels compared to the developed countries.
SPDR Bloomberg Emerging Markets USD Bond ETF (EMHC - Free Report) is one such ETF. The underlying Bloomberg Emerging USD Bond Core Index measures the performance of fixed-rate US dollar-denominated debt issued by sovereign and quasi-sovereign emerging market issuers. The fund yields 4.88% annually and is up 2.1% this year. On the other hand, local currency bond ETF First Trust Emerging Markets Local Currency Bond ETF (FEMB - Free Report) has advanced about 8.1% this year and yields 5.7% annually.