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U.S. Dollar Holds Its Head High: ETFs to Gain/Lose

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The U.S. dollar strengthened lately versus a basket of major currencies as data revealed European inflation is cooling quicker than expected and China's economic recovery is not fast enough than previously thought.

Data on Wednesday showed that inflation in France and some of Germany's biggest states is slowing quickly. Such figures may lead the European Central Bank (ECB) to halt raising interest rates, cutting the euro's attractiveness relative to the dollar.

Weak economic data at China also boosted the U.S. currency, per analysts. A survey released on Wednesday showed that China's factory activity shrank faster than expected in May, hinting at the fact that the country's recovery from COVID-19 lockdowns is under pressure.

"All else being equal, a weak China is a positive for the U.S. dollar, and to some extent the yen, against the euro or the Aussie," said Shusuke Yamada, chief FX and rates strategist at Bank of America in Tokyo, per a Reuters article, quoted on Yahoo.

Meanwhile, some market watchers are betting big on a Fed rate hike in June due to sticky inflation. Per CME FedWatch Tool, about 62.9% chances are there for a 25-bp rate hike in mid-June. If this happens, the greenback may gain further strength given a still-easy monetary policy in Japan and China.

Moreover, China is a key trading partner of Europe. Hence, China’s weak economy recovery may spell trouble for the global market, triggering a worldwide slowdown. If this happens, the apparent safe-haven U.S. dollar should surge again. This is especially, the U.S. economy is on the verge of cracking the debt deal.

Against this backdrop, below we highlight a few winning/losing ETFs amid a strong U.S. dollar.

ETFs to Buy

So, investors looking to play the strengthening U.S. dollar could consider the below-mentioned ETFs:

U.S. Dollar

The dollar strength can sure be played with Invesco DB US Dollar Index Bullish ETF (UUP - Free Report) and WisdomTree Bloomberg U.S. Dollar Bullish ETF (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 S&P Small-Cap 600 Value ETF (IJS - Free Report) could be a good pick. Small-cap investing is more prudent at this time as several U.S. economic data points are decent (if not great) of late.

Dollar-Denominated Bond ETFs

Investors seeking EM exposure amid a strong dollar can 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 developed countries. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB - Free Report) is one such ETF. The fund yields 4.93% annually.

Currency-Hedged International ETFs

After years of lagging, international stocks show signs of a comeback. Rapid changes in the global economy, the receding effects of pandemic coupled with shifting monetary policies are setting the stage for a resurgence (read: 5 Broad International ETFs Beating S&P 500 This Year).

Europe investing has outperformed the United States in the initial phase of 2023. Cheaper valuation, upbeat corporate earnings, a more resilient economy and still-lower interest rates in Europe than United States have led to the rally. iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report) and Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) are some choices out here.

ETFs to Sell

Inverse Dollar Fund

Needless to say, if dollar rises, 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.


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