Dollar at a 4-Year Low? ETFs That You Could Play

The U.S. dollar slid to a four-year low after President Donald Trump downplayed the currency’s decline earlier this month, adding further pressure on the greenback following a prolonged period of weakness, as quoted on Reuters.

The dollar’s recent weakness reflects a combination of factors, including expectations of further Fed rate cuts, tariff-related uncertainty and concerns over Fed independence, among other policy uncertainties, eroding investor confidence in the U.S. macro-outlook.

According to TradingView, the U.S. Dollar Index (DXY) has fallen 1.94% over the past month and 10.74% over the past year. The index has recorded an all-time decline of 19.81%.

Rate-Cut Hopes Weigh on the Dollar

Expectations of further interest rate cuts in 2026 are another headwind for the greenback. 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.

Expectations that the next Fed chair may favor interest rate cuts have raised the prospect of further declines in rates in the years ahead, adding pressure on the greenback.

Diversification Trade Weakens Dollar Appeal

Geopolitical tensions have been the primary driver of market volatility so far in 2026. The turbulent start to the year has been exacerbated by renewed tariff frictions, with the United States emerging as a key source of uncertainty.

Renewed trade-war tensions, layered onto an already complex geopolitical backdrop, further intensify the uncertainty in U.S. markets. Elevated volatility in the world’s largest economy has dampened investor appetite for domestic assets, triggering a rotation of capital away from the United States, putting sustained pressure on the greenback.

A redirection of funds away from the United States reduces demand for the greenback, weakening it as a result and reducing its value. According to LSEG Lipper data, as quoted on a Reuters article, U.S. equity funds saw outflows in the week ending Jan. 21, with investors pulling a net $5.26 billion during the period.

ETFs to Consider

Since currency markets are often driven by shifts in sentiment rather than traditional supply-demand fundamentals, a weakening dollar makes portfolio diversification and hedging even more essential for investors.

Investors can both hedge against a weakening dollar and tap into opportunities that thrive when the greenback slips 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 Chile, South Africa, Mexico, Colombia, Hungary and Malaysia, which comprise the top six countries, among others. CEW has amassed an asset base of $13.4 million and charges an annual fee of 0.55%.

WisdomTree Emerging Currency Strategy Fund has gained 1.24% over the past month and 13.94% over the past year.

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.

Invesco DB U.S. Dollar Index Bearish Fund has gained 1.32% over the past month and 12.17% over the past year. UDN has amassed an asset base of $126.8 million and charges an annual fee of 0.73%.

Investors can also look into the following funds that provide exposure to the basket of currencies tracked by the U.S. Dollar Index, relative to the greenback, rising when the dollar depreciates. The funds are: Invesco CurrencyShares Euro Currency Trust FXE, Invesco CurrencyShares Canadian Dollar Trust FXC, Invesco CurrencyShares Swiss Franc Trust FXF and Invesco CurrencyShares British Pound Sterling Trust FXB.

Precious Metal ETFs

Interest rate cuts by the Fed and a weaker dollar make certain precious metals attractive. A weaker U.S. dollar generally leads to higher demand for precious metals, pushing their price upward as it becomes more affordable for buyers holding other currencies.

Per LSEG Lipper data, gold and precious metals commodity funds surged in popularity, pulling in a net $1.96 billion in the week ending Jan. 21, marking the 10th week of net purchases in the past 11 weeks, as quoted on Reuters.

Funds like abrdn Physical Precious Metals Basket Shares ETF GLTR and Invesco DB Precious Metals Fund DBP give broader exposure to precious metals.

Investors can also consider funds like SPDR Gold Shares GLD, iShares Gold Trust IAU, iShares Silver Trust SLV and abrdn Physical Silver Shares ETF SIVR for more concentrated exposure to gold and silver, especially given their recent rally.

Emerging Market ETFs

A weakening greenback further fuels interest in global equity funds. The greenback's value tends to move inversely with interest rate adjustments by the Fed. Interest rate cuts by the Fed make the U.S. dollar less attractive to foreign investors. Those willing to take on slightly more risk can increase their exposure to emerging market ETFs, unlocking the potential for higher returns. 

Investors may consider increasing exposure to global equity funds, both to benefit from broader geographic diversification and to capitalize on a weakening dollar, further reducing reliance on U.S. assets (Read: Is it Time to Make Room for Global ETFs in Your Portfolio?).

Investors can look at funds like iShares Core MSCI Emerging Markets ETF IEMG, Vanguard FTSE Emerging Markets ETF VWO and iShares MSCI Emerging Markets ETF EEM.  

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This article originally published on Zacks Investment Research (zacks.com).

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