Currency ETFs to Watch as the Dollar Struggles

The greenback is losing its strength and trading near multi-year lows, marking its worst first-half performance since the 1970s. Mounting uncertainty over the Trump administration’s unpredictable tariff policies and U.S. debt level, are fueling investor anxiety and weighing on the greenback’s outlook.

Both technical and fundamental factors are working against the greenback. According to TradingView, the U.S. Dollar Index (DXY) has fallen 2.82% over the past month and 11.13% over the past six months.

Greenback Under Pressure Amid Looming Rate Cuts

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.

Investors have increased their bet on the pace of interest rate cuts by the Fed, ahead of the series of U.S. economic data due this week, according to Reuters. Per analysts, a weak labor data could push the Fed to act sooner, accelerating dollar depreciation.

Per the CME FedWatch tool, markets are anticipating a 97.7% likelihood of a rate cut in September. Goldman Sachs now anticipates three quarter-point rate cuts this year, up from just one cut, per the previous expectation, citing softening labor market trends and limited inflationary impact from tariffs, as quoted on Reuters.

Leadership and political uncertainty of the Fed is a key headwind for the dollar’s standing as a global reserve currency, adding pressure on the greenback. Additionally, according to Reuters, investors are increasingly expecting the Fed to turn more aggressive next year, anticipating a potential leadership shake-up at the central bank.

Other Market Moves

According to FXEmpire, bearish projections from Goldman Sachs and UBS, coupled with increased institutional put positioning on the greenback, suggest the previous month’s sell-off may signal a sustained downturn in the dollar.

The U.S. economy appears to be heading toward a slowdown, adding to downward pressure on the dollar. Increasing volatility in the economy has decreased investor appetite for U.S. assets, exerting further 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.

ETFs to Consider

Investors can look to hedge themselves 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 Korea, Mexico, South Africa, Brazil, Colombia and Poland, 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 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports

Invesco CurrencyShares British Pound Sterling Trust (FXB): ETF Research Reports

Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports

Invesco CurrencyShares Canadian Dollar Trust (FXC): ETF Research Reports

Invesco CurrencyShares Swiss Franc Trust (FXF): ETF Research Reports

WisdomTree Emerging Currency Strategy ETF (CEW): ETF Research Reports

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

Zacks Investment Research