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A Tale of Two Currencies and The ETF Impact

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By now, the greenback’s loss and strength in euro are known to all. The year 2017 can easily be credited to euro in the currency ETF world. Guggenheim CurrencyShares Euro Trust (FXE - Free Report) gained about 14.6% in the last one year (as of Jan 24, 2018) while PowerShares DB US Dollar Bullish ETF (UUP - Free Report) lost about 10%. So far this year, the euro is up about 2.8% while the U.S. dollar slipped almost similarly.

Inside Euro’s Gain

Investors are betting on a likely strengthening in the single currency in 2018 after a great 2017 — “its best year versus the greenback since 2003.” Goldman Sachs is also bullish on euro for this year. 

In a historic meeting in October, the ECB announced that it would extend its asset-purchase program through September 2018 at a reduced rate. The meeting marked the ECB’s first withdrawal of stimulus. Probably, this gradual tightening made Goldman bullish on Euro.

Late last year, Goldman predicted the euro-yen rate to head to 140 in 2018, about 3.3% higher than the current level of 135.52 (read: Follow Goldman With These ETFs for 2018). 

The single currency reached its highest point since December 2014, to react to the ECB meeting.

European stocks too came under pressure in recent sessions thanks to a stronger euro as it lowers the region’s export competitiveness. Vanguard FTSE Europe ETF (VGK - Free Report) is up 8.7% in the last three months (as of Jan 25, 2018) versus 10.9% gains for SPDR S&P 500 ETF (SPY - Free Report) .

Inside Dollar’s Pain

The dollar dropped to near three-year lows against its peers on Jan 25 after falling on comments by U.S. Treasury secretary Steven Mnuchin that he welcomes a weaker currency. The dollar flopped after Mnuchin indicated that a weaker dollar is a positive for U.S. trade.

In any case, the U.S. dollar has been in the spotlight since before the presidential election. Trump is a “low interest rate person.” Concerned about the U.S. economy’s $19 trillion of debt, Trump wants to keep the interest rate low ahead so that the country does not have to end up with a huge interest payment.

If this is not enough, Trump is expected to push for currency wars against the key trading partners of the United States, as per the source. Agreed, his mode of war was supposed to be via tariffs, but a lower greenback route wasn’t completely brushed off.

The President’s main concern is that in a rising dollar environment, the profitability of U.S. businesses having considerable foreign exposure will be hurt. This is especially true given that Japan and the Euro zone are still practicing an ultra-easy monetary policy which in turn is making American goods pricier than European or Japanese products (read: Trump Talks Down U.S. Dollar: What Lies Ahead for ETFs?).

Most recently, President Donald Trump levied tariffs on imported solar panels and washing machines. His move on trade protectionism weighed on the greenback (read: Trump's Import Tariffs: ETF & Stocks in Focus).

Thanks to such moves, gold prices jumped on Jan 25, touching their highest since August 2016, as investors rushed to tap an inflation-protected asset amid the U.S. government’s preference for a weaker greenback.

SPDR Gold Shares (GLD - Free Report) is up about 2.9% so far this year while the bullion ETF witnessed an 11.8% rise in the last one year (as of Jan 25, 2018) (read: 3 ETFs to Buy on Spike in Gold Investments).

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