The U.S.-dollar-based exchange-traded fund Invesco DB US Dollar Index Bullish Fund UUP has lost about 7.9% so far this year (as of April 24, 2025). Below, we highlight a few reasons that could keep the greenback muted in the near term.
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. George Saravelos of Deutsche Bank has been sounding warnings about the U.S. dollar for a while, and now he’s intensifying his concerns, as quoted on MarketWatch.
According to analysts at Goldman Sachs, 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.
Weakening Correlation Between Greenback and Stock Markets?
Back in early March—around the time some traders were anticipating a temporary inflation spike due to U.S.-imposed tariffs— Deutsche Bank’s Saravelos cautioned that the dollar could lose its status as a safe-haven currency, pointing to a weakening correlation between the dollar and stock markets.
Trade De-Escalation to Ensure Fed Rate Cuts?
Wall Street witnessed signals of easing trade tensions from the start of this week. President Trump and Treasury Secretary Scott Bessent both hinted that 145% tariffs on Chinese goods could be reduced in the near future. If trade tensions ease and inflation remains contained, the Fed may be able to cut interest rates faster. This, in turn, may weigh on the greenback.
Any level of U.S. tariffs and reciprocal tariffs is detrimental to the greenback. The uncertainty surrounding trade tariffs is complex, but it also presents an opportunity for Europe to assert itself as an economic and geopolitical superpower, the governor of the Bank of Latvia told CNBC. So, it is no wonder, Invesco CurrencyShares Euro Trust FXE has added 11% in the year-to-date frame. Invesco CurrencyShares Swiss Franc Trust FXF has added 10.3% during the same timeframe (as of April 24, 2025).
ETFs to Consider
Against this backdrop, below we highlight a few exchange-traded fund (ETF) areas that could be gainful for investors.
Emerging Market Equities – iShares MSCI Emerging Markets ETF (EEM)
The falling U.S. dollar could create new opportunities for emerging markets investing, as a weaker dollar may boost the competitiveness of these economies and attract foreign capital. The ETF EEM has gained 4.2% so far this year (as of April 24, 2025).
Emerging Market Local Bonds – VanEck JP Morgan EM Local Currency Bond ETF EMLC
Investors seeking EM exposure amid a falling dollar should not consider dollar-denominated EM bond ETFs. Note that, the debt route is less risky than equities. Moreover, most emerging markets have low debt levels compared to the developed countries. The EMLC ETF is up 5.2% this year (read: EM Local Bonds Outpace Dollar Peers: Winning ETFs in Focus).
Short Dollar – 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. The ETF is up 10.9% this year.
Digital Currencies – iShares Bitcoin Trust ETF IBIT
Investors with an increased risk appetite and tolerance for extreme volatility can also consider an alternative route with digital currencies. Investors can consider IBIT. The fund is off 3.8% this year but added 10.6% past week (read: TRUMP Meme Coin Soars 60%: Crypto ETFs at One-Month High).
Digital currencies have shown less correlation with the stock market. Trump’s inclination for the digital currency is another plus for the space. However, given the recent rise in uncertainty, it is advisable for investors to adopt a more conservative hedging approach.
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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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