Currency ETFs to Play With Dollar on the Ropes

The greenback is on a gradual decline, amid mounting uncertainty over the Trump administration’s unpredictable tariff policies, which are fueling investor anxiety and weighing on the greenback’s outlook.

The U.S. Dollar Index (DXY) has been trending downward since its early January peak. According to TradingView, DXY has fallen 3.83% over the past month and 9.85% year to date.

Increasing volatility in the world’s biggest economy has decreased investor appetite for U.S. assets, exerting pressure on the country’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.

Below, we take a closer look at additional factors driving investors away from the greenback.

Asia Rethinks Dollar Dominance

De-dollarization efforts in Asia are gaining pace, driven by a combination of geopolitical volatility and a growing preference for currency hedging across the region. According to ING FX strategist, Francesco Pesole, the Trump administration’s unpredictable trade policies and the greenback’s depreciation are likely driving the transition away from the dollar, as quoted on CNBC.

According to CNBC, the dollar’s share in global foreign exchange reserves fell to 57.8% in 2024 from over 70% in 2000. Per Lin Li, head of global markets research for Asia at MUFG, as quoted on CNBC, a growing number of Asian nations are shifting toward local currencies in cross-border trade as they look to minimize exposure to dollar volatility.

Along with ASEAN economies, BRICS nations such as India and China are advancing their own cross-border payment systems.

According to Nomura, as quoted on CNBC, de-dollarization is gaining pace as Asian investors increasingly hedge their greenback exposure. By hedging their dollar exposure, investors sell the greenback and purchase local or alternative currencies, boosting demand for those currencies and strengthening them relative to the dollar.

Investors Embrace Other Currencies as Safe Havens

Relative to the greenback, the Euro surged to its highest level since 2021 as investors saw it as a safe haven amid persistent geopolitical risks and concerns over the U.S.-China trade deal.

According to Reuters, the euro’s strength was partly attributed to a hawkish ECB stance, while traditional safe havens like the Swiss franc and Japanese yen also gained ground.

Other Market Moves

Softer-than-expected U.S. inflation data boosted investor confidence that the Fed could begin cutting interest rates as early as September, according to Reuters. Per the CME FedWatch tool, markets are anticipating a 72.7% likelihood of a rate cut in September.

The value of the greenback is closely related to the Fed’s monetary policies. The greenback's value tends to move inversely with interest rate adjustments by the Fed. Interest rate cuts by the Fed make the dollar less attractive to foreign investors, as this weakens it.

The dollar approached a 2025 low as investor demand shifted away from the greenback amid escalating geopolitical tensions, after the United States ordered some embassy staff to leave Baghdad and authorized military families to exit the Middle East, following Iran’s threat to target U.S. bases if nuclear talks break down.

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.

The fund has exposure to the currencies of South Africa, Mexico, South Korea, Brazil, Indonesia and Turkey, which comprise the top six countries, among others. CEW charges an annual fee of 0.55%.

WisdomTree Emerging Currency Strategy Fund has gained 4.45% over the past three months and 7.03% 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 8.67% over the three months and 7.40% over the past year. UDN charges an annual fee of 0.78%.

Investors with a bearish outlook on the U.S. dollar can also consider 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 can consider Invesco Currencyshares Japanese Yen Trust FXY, Invesco CurrencyShares Euro Currency Trust FXE and Invesco CurrencyShares Swiss Franc Trust FXF.

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

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