U.S. Dollar At 10-Month High: ETFs To Buy & Sell

Despite a dovish Fed and recessionary fears, the greenback has been steady this year with about 3.3% gains in Invesco DB US Dollar Index Bullish Fund UUP. The reason behind the rally is the U.S. economy’s much-better positioning in the developed market pack. Disappointing manufacturing data from Germany and France has kept the euro subdued and brightened the U.S. dollar against a basket of currencies.

U.S. retail sales increased 1.6% in March, breezing past market expectations of a 0.9% rise. This marked the biggest increase in retail trade since September 2017 helped by sales of motor vehicles and a range of other goods, per tradingeconomics.

The upbeat sentiments prevailed in the manufacturing sector too. The Institute for Supply Management’s Manufacturing PMI in the United States increased to 55.3 in March from February’s 54.2. The reading also surpassed market expectations of 54.5 (read: U.S. Manufacturing Sector Grows in March: ETF & Stock Picks).

After the latest blockbuster retail-sales report, the Atlanta Fed’s GDPNow model is now forecasting a 2.8% annualized growth rate for the first quarter, And if the reading comes in that range, the greenback may surge higher.

Given the ailing economic conditions in the developed market, the bullish trend in the greenback is expected to continue at least in the near term.

ETFs to Buy

So, investors looking for a play on the U.S. dollar could consider below-mentioned ETFs:

Dollar

Needless to say, a strengthening dollar can be played with UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.

Small Caps

Since small caps are closely tied to the U.S. economy and do not get thrashed by a rising dollar due to their lesser foreign exposure, Vanguard Small-Cap Index Fund ETF Shares ( (TO:VB) ) could be a good pick in this kind of a situation. Small-cap investing is more prudent at this time as several U.S. economic data points are coming in solid of late. For example, gains in retail sales for March were the best in one-and-a-half years.

Inverse Emerging Markets

Emerging markets (EM) are normally caught off-guard by a rising dollar. Higher rates in the United States along with a stronger dollar dull the appeal of emerging markets around the globe, leading many to sell their shares. So, if the greenback continues to soar, investors can go short on EMs by investing in ProShares Short MSCI Emerging Markets EUM.

Dollar Denominated Bond ETFs

Investors wanting an EM exposure amid a strong dollar, can consider dollar-denominated EM bond ETFs. These funds invest in sovereign debt from a variety of emerging nations but do so via U.S. dollar-denominated securities. Notably, the debt route is less risky than equities. Moreover, most emerging markets have low debt loads than developed countries. iShares J.P. Morgan USD Emerging Markets Bond ETF (AX:EMB) is an example of such ETFs.

Currency-Hedged Japan

About half of economists now expect the Bank of Japan will resort to more policy easing thanks to sagging inflation. Tepid outlook on inflation could be a drag on the currency yen. If this happens, currency-hedged Japan ETFs like WisdomTree Japan Hedged Equity ETF DXJ should do well.

ETFs to Sell

Inverse Dollar Fund

Needless to say, if the dollar is rising then a short position on the currency would result in negative returns. Invesco DB US Dollar Index Bearish Fund (UDN) thus should be avoided.

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