As countries fall on rough patches or times of prosperity, the highly liquid foreign exchange market will be there to reflect the ebbs and flows in international currencies. Currently, with most of the risk centered around the eurozone, again, traders may take defensive positions in safe-haven currency exchange traded funds.
The debt problems in the eurozone have a large impact on the currency markets, pushing investors to the safety of the U.S. dollar and Japanese yen.
- PowerShares DB US Dollar Index Bullish Fund (UUP): up 2.4% over the past 3 months
- WisdomTree Dreyfus Japanese Yen Fund (JYF): up 3.4% over the past 3 months
- CurrencyShares Japanese Yen Trust (FXY): up 3.4% over the past 3-months
"They are good hedges for investors who aren't able to play directly in the currency markets," Laurence Wormald, head of research at SunGardAPT, said, reports Kelley Holland for CNBC.
In times of financial duress, investors typically seek refuge in Treasuries, and as a result of the greater international interest in Treasury bonds, the U.S. dollar will strengthen against global currencies. Additionally, countries with strong current accounts, like Japan, also attract the attention of safe-haven currency traders.
However, the Swiss franc and the CurrencyShares Swiss Franc Trust (FXF), a traditionally safe currency play, has not been able to protect traders this time around after the Swiss National Bank intervened in its currency market and pegged it to the euro currency in an attempt to depreciate the overvalued franc.
Once the global economy improves, currency traders may want to take a look at emerging market currencies like the CurrencyShares Chinese Renminbi Trust (FXCH) and WisdomTree Dreyfus Brazilian Real Fund (BZF), along with the CurrencyShares Australian Dollar Trust (FXA), which is closely tied to the well-being of China, Australia's largest trading partner.
Anthony Davidow, portfolio strategist at Guggenheim Investments, believes that China's currency has upside potential, reports Kelley Holland in a separate CNBC article.
"The basic premise is it's undervalued" due to the country's long standing protectionist policies, Davidow added, "and China will have to be part of any sort of global recovery."
Currency ETFs help create a well-rounded, diversified investment portfolio.
"Historically, people didn't have to worry about foreign currencies," Michael Rawson, ETF analyst at Morningstar, said in the CNBC report. "Now the importance of trade in our economy has increased, and the importance of inflation has increased. We recognize that demand for internationally traded goods - food, oil - are based of international demand, not just U.S. demand."
Max Chen contributed to this article.