Position Your Portfolio for Rate Cuts With These Currency ETFs

As the Fed prepares for an interest rate cut in its September meeting, expectations are rising that the greenback may weaken, making investments in foreign currencies more attractive. Also, driven by a mix of political and economic factors, the greenback is gradually losing its global dominance. The U.S. Dollar Index (DXY) has been trending downward since late July.

Rate cuts by the Fed, central banks’ gold purchases and the momentum toward “de-dollarization” are increasing the need for investors to diversify and hedge their portfolios by considering alternative currencies.

Rate Cut to Weaken the Greenback

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 the U.S. dollar.

A Fed rate cut might prompt investors to seek higher-yielding opportunities elsewhere, resulting in a redirection of funds away from the United States. This reduces demand for the greenback, weakening it as a result and reducing its value.

According to the CME FedWatch Tool, the Fed has a 41% probability of lowering rates to 5-5.25%, while there's a 59% likelihood that they could drop further to 4.75-5%.

According to Yahoo Finance, Bloomberg's U.S. currency index fell 0.4% on Monday, reaching its lowest point since mid-January 2024. Per Rodrigo Catril, National Australia Bank Ltd strategist, as quoted on Yahoo Finance, the greenback is poised to enter a phase of cyclical decline.

De-Dollarization Gains Speed and Central Banks Turn to Precious Metals

The macro environment and other economic factors are pushing economies to seek alternative currency options in a bid to reduce the global dominance of the greenback. This could result in the demand for the U.S. dollar decreasing, depreciating the currency.

Central banks in advanced economies are increasing their gold reserves, mirroring the stance of emerging economies in purchasing the metal. Central banks globally added nearly 500 tons of gold to their reserves in the first half of 2024, surpassing the previous year's record. This surge reflects efforts by some nations to diversify away from the U.S. dollar, among other factors.

ETFs in Focus

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 emerging market nations.

The fund has exposure to currencies of Thailand, South Korea, Turkey, Poland, Malaysia and the Philippines, which comprise the top six countries, among others. The majority of the fund’s exposure is in Asia (50.26%), followed by South America (20.84%) and East Europe (14.42%).

WisdomTree Emerging Currency Strategy Fund has gained 2.46% over the past three months and 6.09% 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 3.60% over the three months and 4.87% over the past year.

Investors can also look into the following funds that provide exposure to the basket of currencies tracked by the U.S. Dollar Index (USDX), relative to the greenback, rising when the dollar depreciates.

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

Invesco Currencyshares Japanese Yen Trust FXY has gained 3.30 over the past month and 7.83% over the past three months.

Invesco CurrencyShares Euro Currency Trust FXE has gained 2.48% over the past month and 2.52% over the past three months.

Invesco CurrencyShares Canadian Dollar Trust FXC has gained 2.67% over the past month and 1.67% over the past three months.

Invesco CurrencyShares Swiss Franc Trust FXF has gained 3.73% over the past month and 6.29% over the past three months.

Invesco CurrencyShares British Pound Sterling Trust FXB has gained 2.58% over the past month and 4.05% over the past three months.

Digital Currencies

De-dollarization and Fed rate cuts can also create opportunities in digital currencies.Despite recent volatility and a downtrend, Bitcoin appears to be regaining momentum. The long-term prospects for these assets remain bullish, driven by potential interest rate cuts from the Fed and a stable economic environment (Read: Bitcoin Back on a Bullish Path? ETFs in Focus)

Investors can look at iShares Bitcoin Trust ETF IBIT, Grayscale Bitcoin Trust GBTC, Fidelity Wise Origin Bitcoin Fund FBTC and Bitwise Bitcoin ETF Trust BITB.

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