ETFs to Consider as Greenback Falls

Driven by the Trump administration’s chaotic tariff policies and a shift in investor focus away from U.S. assets, the greenback is on a gradual decline. According to Yahoo Finance, the dollar recently fell to a six-month low, adding to the pressure already weighing on financial markets and raising doubts about the greenback's status as a safe-haven asset.

According to TradingView, the U.S. Dollar Index (DXY) has fallen 4.02% over the past month and 8.26% year to date. Per Yahoo Finance, a key options market index, tracking three-month risk reversals, recently fell to a five-year low, indicating stronger demand for dollar put options that profit from a weaker dollar.

Per Derek Halpenny, head of global markets research at MUFG Bank, it is unlikely that any fundamental factor would boost investor sentiment, as quoted on Yahoo Finance. Halpenny added that with the dollar breaking through key support levels last week, there’s little room for optimism ahead.

Investors Losing Faith in the Greenback?

Per a Bloomberg Survey, nearly 80% of respondents expect the dollar to further decline over the next month, marking the highest bearish sentiment recorded since 2022.

Strategists at major Wall Street banks are also forecasting continued downside for the greenback. Analysts at JPMorgan Chase & Co. advise investors to stay bearish on the dollar, particularly against the yen and euro, citing the ongoing risk of a U.S. recession.

According to analysts at Goldman Sachs, as quoted on Yahoo Finance, implementations of the reciprocal tariffs already resulting in a decline in consumer and business confidence, are expected to weigh on the greenback.

As the currency market is often driven by investor sentiment instead of economic fundamentals of supply and demand, the need for investors to diversify and hedge their portfolios from a weakening greenback becomes necessary.

Trump, Recession and Dollar’s Decline

According to the New York Times, the greenback has seen a sharp decline following President Trump’s recent announcement of tariffs on imports from nearly every country. Since then, it has weakened against the euro, yen, pound and several other currencies. Also, to boost domestic manufacturing and make manufacturing competitive, President Trump wants a weaker greenback.

President Trump’s introduction of reciprocal tariffs has decreased investor appetite for U.S. assets, exerting pressure on the U.S. economy and 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.

Additionally, escalating global trade tensions have increased the likelihood of a recession in the United States, which may push the Fed to cut interest rates in order to stabilize the economy. Lower rates may put further pressure on the greenback, driving it even lower.

ETFs to Consider

Investors can look to hedge themselves, especially in the short term, against the likelihood of the greenback depreciating and diversify their portfolios by increasing their exposure to the following mentioned 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 emerging market nations.

The fund has exposure to currencies of Poland, Mexico, Chile, the Philippines, Brazil and India, which comprise the top six countries, among others. CEW charges an annual fee of 0.55%.

WisdomTree Emerging Currency Strategy Fund has gained 3.54% over the past three months and 4.42% 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 3.42% over the three months and 4.78% over the past year. UDN charges an annual fee of 0.78%.

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. Investors with a bearish outlook on the U.S. dollar can opt for these funds.

Investors can consider Invesco Currencyshares Japanese Yen Trust FXY, 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.

Digital Currencies

Investors with an increased risk appetite and tolerance for extreme volatility can also consider an alternative route with digital currencies. Investors can consider iShares Bitcoin Trust ETF IBIT and Fidelity Wise Origin Bitcoin Fund FBTC. However, given the recent rise in uncertainty, it is advisable for investors to adopt a more conservative hedging approach.

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

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