Investors aren't waiting for the U.S. dollar to find a bottom. They're already trading on the decline for a while now. Whether it's bearish dollar funds, gold ETFs, or emerging market ETFs, market positioning is indicating that the weakness in the dollar is being viewed as a structural issue, not a short-term rate play.
Anti-Dollar ETFs Take Center Stage
One of the first groups of funds to take center stage are those that profit from a falling dollar. The Invesco DB U.S. Dollar Index Bearish Fund (NYSE:UDN), which increases in value as the dollar falls against a portfolio of major world currencies, is up over 2.3% in the past five days and 10% in the past year, as investors hedge against a falling dollar.
The WisdomTree Emerging Currency Strategy Fund (NYSE:CEW), which provides active exposure to emerging market currencies that historically perform well when investors shift their portfolios out of dollar-denominated assets, is another example of a fund that profits from a falling dollar. On Jan 26, this fund saw $2 million dollars in inflows, according to Etfdb.com.
These ETFs are becoming increasingly popular not only as a trade, but as a hedge against portfolio risk due to growing U.S. policy uncertainty.
Precious Metals ETFs Retain Safe-Haven Status
Precious metals ETFs have also continued to be beneficiaries of a weaker dollar. Lower real yields and currency weakness are generally positive drivers of gold and silver prices, making precious metals a natural hedge during times of political and monetary turmoil.
According to LSEG Lipper data, cited by Reuters, gold and precious metals commodity funds saw net inflows of $1.96 billion for the week ending Jan 21, marking the 10th consecutive week of inflows in the last 11 weeks, as reported by Reuters. Broad-based ETFs such as abrdn Physical Precious Metals Basket Shares ETF (NYSE:GLTR) and Invesco DB Precious Metals Fund (NYSE:DBP) offer diversified investment options, while SPDR Gold Shares (NYSE:GLD) and iShares Gold Trust (NYSE:IAU) are popular choices for targeted investments.
Emerging Market ETFs Benefit From Softer Dollar
The weakening greenback has also increased interest in emerging market equity ETFs. A softer dollar reduces debt-servicing burdens for emerging markets and improves local currency performance, making EM assets relatively more attractive.
Investors such as those in the iShares Core MSCI Emerging Markets ETF (NYSE:IEMG), Vanguard FTSE Emerging Markets ETF (NYSE:VWO), and iShares MSCI Emerging Markets ETF (NYSE:EEM) are usually some of the first beneficiaries of a sustained dollar decline, especially when U.S. growth uncertainty is involved. All three funds have gained between 5% and 8% so far this month.
Policy Risk Now Weighs On The Dollar
The ETF rotation is happening as the U.S. dollar continues to decline in light of expected Federal Reserve interest rate cuts and growing concerns about the independence of the Federal Reserve. The recent comments by President Donald Trump about the dollar's decline have only served to heighten concerns about the dollar's future, as it seems that the administration may have a say in future monetary policies.
The U.S. Dollar Index (DXY) has declined by 1.8% this year so far and over 10% in the last year.
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