The greenback continues to remain under heavy pressure this year and is poised for its steepest weekly decline in over three months (as of Oct.16). Fed interest rate cuts, as well as economic instability and renewed trade tensions, are increasing investor anxiety and weighing on the greenback’s outlook.
Dollar Falters on Rate-Cut Bets
The value of the greenback is closely related to the Fed’s monetary policies. Its value tends to move inversely with the Fed's interest rate adjustments. Interest rate cuts by the Fed make the dollar less attractive to foreign investors, as these weaken it.
According to the CME FedWatch tool, markets are anticipating a 96.8% likelihood of interest rates being lowered to 3.75-4% in October and an 81.5% likelihood of interest rates being cut to 3.5-3.75% in December.
Additional Challenges Weighing on the Greenback
According to Yahoo Finance, concerns over U.S. regional banks, a prolonged government shutdown and limited economic reports pushed the dollar lower for the fourth day.
Pressure on the dollar rose as regional bank stocks slumped over lending issues. Per the abovementioned Yahoo Finance article, options indicate a shift toward near-term bearishness, even as year-end positioning continues to favor dollar strength.
According to Dilin Wu, research strategist at Pepperstone, rising worries over trade, Fed independence and the U.S. shutdown are leaving the greenback exposed to “debasement” trade, with investors favoring hard-to-devalue assets, as quoted on Reuters.
ETFs to Consider
With sentiment often driving currency markets more than traditional supply-demand fundamentals, the need for investors to diversify and hedge their portfolios from a weakening greenback is necessary.
Investors can hedge themselves against the likelihood of the greenback depreciating and diversify their portfolios by increasing their exposure to the following funds.
WisdomTree Emerging Currency Strategy Fund CEW
WisdomTree Emerging Currency Strategy Fund employs an active strategy and provides exposure to various emerging currencies worldwide relative to the U.S. dollar, making it a quality fund to invest in.
The fund has exposure to the currencies of Colombia, South Africa, Hungary, Brazil, Poland and Mexico, which comprise the top six countries, among others. CEW has amassed an asset base of $9.4 million and charges an annual fee of 0.55%.
Invesco DB U.S. Dollar Index Bearish Fund UDN
Invesco DB U.S. Dollar Index Bearish Fund offers exposure to a basket of currencies relative to the greenback, rising when the dollar depreciates. UDN is an appropriate option for investors with a bearish outlook on the U.S. dollar.
UDN has amassed an asset base of $153.3 million and charges an annual fee of 0.78%.
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WisdomTree Emerging Currency Strategy ETF (CEW): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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