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What a difference just a few months makes. The euro has fallen out of favor in recent months, weighed down by PIIG concerns, naturally benefiting the dollar. Not everyone is bullish on greenback ETFs in the long-term, though.

The dollar is at a crossroads, having made some decent gains in recent months (PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) is up 2.4% year-to-date). While some feel that this could mark a new era of strength for our currency, others see potholes lurking in the distance.

Jordan Di Pietro for The Money Times is one such person. It wasn’t so long ago that the dollar sagged to a 15-month low against a basket of major currencies and analysts are calling for an equally dreary 2010.

What could knock the dollar off its lofty perch?

  • Interest rates are stagnant. The Fed announced that the target federal funds rate will be set at 0% to 0.25% for “an extended period.” With interest rates that low, foreign investors will continue borrowing in the United States and investing abroad, where they can get higher returns. In turn, foreign markets will rise and additional investment abroad will continue to weigh on the dollar.
  • Foreign investment: The rapid influx of capital into emerging markets such as China, India, and Brazil could raise the value of their currencies, as asset prices tend to increase over time. Again, in this equation, the dollar could be on the losing end.

Where does that leave you?

If you’re among the dollar bears, one way to hedge that weakness is to diversify away from dollar assets. DiPietro says that one way to do this is by investing in domestic small-cap companies that earn at least 20% of their revenue overseas. A weak dollar makes our goods and services cheaper for foreigners. Schwab U.S. Small-Cap (NYSEArca: SCHA) could be an opportunity.

Commodities also tend to fare better when the dollar is weak; resources like oil and gold are generally priced in U.S. dollars, making them cheaper and thus more appealing for international buyers. United States Oil (NYSEArca: USO) and ETFS Gold Shares (NYSEArca: SGOL) are two funds out of many that will nab you this exposure.

And don’t forget the bearish dollar ETF, PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN), a straightforward way to play negative dollar sentiment.

If you’re bullish on the dollar, one way to capitalize is by looking abroad. A strong dollar means greater purchasing power, but conversely, less demand for American goods. You might begin to see more goods purchased from China, more investment in emerging markets, greater imports of basic materials from major producers and so on. And, naturally, the bullish dollar fund is a direct play on a gaining greenback. A few funds that might work in this kind of environment include:

  • iShares FTSE/Xinhua China 25 (NYSEArca: FXI)

  • EGS Dow Jones Emerging Markets Titans Composite (NYSEArca: EEG)

  • iShares S&P Latin America 40 (NYSEArca: ILF): Latin America is one of the most resource-rich continents in the world

  • Market Vectors Steel (NYSEArca: SLX): has nearly a 60% weighting to overseas markets

  • PowerShares DB U.S. Dollar Index Bullish (NYSEArca: UUP)

Source: 9 ETFs for Dollar Bears and Bulls