24 April 2024

The Risks of Betting on the Rising U.S. Dollar

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The dollar is on a tear. But if you are considering a direct bet on a rising greenback, it could pay to think twice. The WSJ Dollar Index hit a five-year high on Nov. 6, and it is up 8.2% in 2014, through Wednesday. The index gauges the dollar’s performance against a basket of currencies, including the euro and the yen.

The dollar is gaining strength as the Federal Reserve inches toward raising interest rates perhaps as soon as next year. Central banks in Europe and Japan, by contrast, still are trying to boost growth with looser monetary policies. The dollar hit a seven-year high against the yen on Tuesday, less than two weeks after the Bank of Japan announced an expanded stimulus plan.

U.S. stocks also stand to benefit if global investors are drawn by an improving U.S. economy and discouraged by often lackluster prospects at home. But betting on funds that are designed to profit from a rising dollar can be a risky move, experts say. Currencies can be volatile and their swings can be unpredictable, which means that investors could end up losing money even if U.S. stocks keep rising for other reasons.

There are only a handful of funds that focus exclusively on dollar appreciation. Three of the largest together hold nearly $1.2 billion. The dollar’s rally has sparked strong interest in those funds from investors, who have pumped more than $405 million into the funds this year, through Oct. 31—much of it in recent weeks—according to Chicago-based investment researcher Morningstar.

These types of funds generally attract investor dollars when currency values are particularly volatile, taking in nearly $1 billion in 2011, when concerns about sovereign debts in the eurozone spiked.  The funds have some virtues, including offering a potential buffer against falling stock prices.

Another ETF that bets on the greenback is the WisdomTree Bloomberg U.S. Dollar Bullish Fund , which has $157 million in assets. The fund is up 6.1% this year, and charges 0.50% in fees.

The third such fund is the ProFunds Rising U.S. Dollar fund. The $63 million mutual fund is up 7% this year, through Wednesday. Annual fees are 1.79% and there is a minimum $15,000 investment.

Investors in such funds, however, risk getting blindsided by events that can send currency values tumbling, and they don’t collect dividends, as they do with stocks, to compensate for potential losses. It also is difficult to determine whether the dollar might be overvalued relative to other currencies since it has no revenues or earnings against which to measure its price.

The rally in the dollar could fizzle, for example. The U.S. currency is currently acting as a haven for investors worried about global crises, for example, but those concerns may wane. Until recently, the dollar had been losing ground against other currencies for years, as U.S. interest rates remained low.

If the U.S. economy continues to rebound, inflation stays low and the Fed’s policy moves don’t curb the stock rally, the returns on equities could be greater than the gains in the dollar. So investors focused on long-term growth may not need a currency fund.

Click here to access the full article on The Wall Street Journal.

 

 

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