Currency ETFs: The Euro is 'So' Yesterday

by: Gary Gordon posted on: May 12, 2008 | about stocks: BZF / CYB / FXE / GLD / ICN / UUP    

I wrote extensively about investing in the Euro last year. In September 2007, I considered the CurrencyShares Euro (FXE) the "closest thing to a sure thing."

Yet smarter investors are not going to bet in favor of the euro and against the U.S. dollar for much longer. Consider the facts:

1. The U.S. economy is experiencing recessionary pressures from "real estate gone wild." Still, we're not headed for the bread lines. And the treasury yield curve is signaling that the U.S. will recover down the road. (See my previous column, "Wanna Know When Things Will Get Better?")

2. The U.S. Federal Reserve is going to hold rates steady for the foreseeable future. Meanwhile, there's already evidence of slower growth in Europe. In fact, some economists see eurozone growth slowing to the point where the European Central Bank will have to cut interest rates. While the differing directions in monetary policies won't send the U.S. dollar soaring, the circumstances do not indicate further deterioration for the U.S. currency.

3. Investors typically move in droves to gold when they worry about the safety of the U.S. dollar. Yet, gold peaked in the third week of March as the Fed was busy orchestrating JP Morgan's acquisition of Bear Stearns. Similarly, The U.S. dollar more or less hit rock bottom during "March Madness." (See the price movement of Gold (GLD) and the PowerShares DB US Dollar Index Bullish (UUP) in the chart below.)

The "contrarian" indicators couldn't be more favorable for the U.S. dollar; that is, there have been endless stories on the death of the U.S. currency, beginning with the Economist's December 1, 2007 cover. There, one sees George Washington's face on the $1 bill of an airplane going down in flames. Similar stories on the death of the U.S. currency have appeared with increasing frequency throughout 2008.

It follows that it makes little sense to favor the euro over the U.S. currency. The CurrencyShares Euro (FXE) is yesterday's news.

Am I bullish on the U.S. dollar? Not exactly. Our stagflation-prone/super slow-growth economy isn't a prescription for steady appreciation in the buck.

Instead, I have suggested that the next "sure thing" may be the Chinese renminbi (yuan). Other emerging market currencies may gain ground as well.

How can you successfully invest in these currencies? Starting tomorrow, May 13, the launch of 3 new ETFs by WisdomTree will give investors the opportunity to invest in the Chinese Yuan (CYB), the Indian Rupee (ICN) and/or the Brazilian Real (BZF).

Before diving in, it would be nice to see a pattern of trading for these new currency ETFs. If you're looking to invest immediately in Asian currency strength, you may wish to consider the Merk Asian Currency Fund [MEAFX].

Disclosure: The author is president of Pacific Park Financial, Inc., which may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

This article has 3 comments! Add yours below...
Gary Gordon

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This article has 3 comments:

  •  
    willynill
    May 13 05:31 PM
    Are you sure the RMB will continue to appreciate? Will China want to cash in their $1.4 trillion of Treasury securities for dollars that are worth less?
  •  
    GMiki
    May 13 07:26 PM
    The U.S. economy continues to deteriorate, despite the current optimism or prevailing sentiment. Currencies are into "competitive devaluation," so if the dollar looks good, that might be merely against some other limp contenders. China is another inflating economy. I wouldn't bet *against* China, but I wouldn't necessarily bet with it.

    Gold is undergoing a normal and in fact mild correction--aka a consolidation. You can do no better than to place your money on gold--physical first, then GLD, then some of the stocks. Gold hasn't even taken off yet, much less topped out. Nor has the dollar truly bottomed. The big question: Which comes first, the elections or the next horrendous U.S. financial crisis?

    You can't say it's dull.
  •  
    Lou Thomas
    May 14 05:30 AM
    seekingalpha.com/artic...

    Your statement that the U.S. is not heading for the bread lines is a bald assertion, and I certainly do not agree. In a way, you are begging the question, since U.S. economic weakness is at the heart of the dollar's weakness. Some evidence, please!

    The article argues that a steepening Treasury yield curve (happening at the time the article was written) is a sign that the market expects a recovery. But as of this writing, just a day or so later, the curve has flattened, which shows just what a fickle indicator that is. And even if it had not, a steepening curve is an ambiguous signal; could it not just as easily mean that a lack of confidence in the dollar is expected to force the Treasury to increase yields to attract fleeing foreign investors so that the massive U.S. debt can be financed, *despite* a continuing economic need for more interest-rate relief? Such circumstances, even though they include an interest rate increase, would not be a net positive for the dollar.

    And besides, since when are Treasury investors such oracles about what is going to happen next to the dollar? They have an opinion, expressed collectively as a number, and as a columnist you really ought to be performing your own analysis rather than tapping into their "group mind," because it might just be the group mind of a bunch of confused sheep reading columns like yours.

    Then there is the pure speculation that the ECB will have to cut rates. How long have dollar apologists been predicting this, only to be slapped in the face by Trichet? But they love to take a beating, and keep reciting the same old line, even though Trichet says very clearly and consistently that inflation is his main concern. As for the Fed stopping cuts, we are already at a differential of 2 percent - is that not enough for you? Already the dollar is becoming a funding currency for a carry trade. And will the Fed actually stop when the economy is continuing to slide?

    And then there is the claim that because gold is taking a breather the dollar must be safe. Wrong. Your own chart, taken as a whole, shows that gold is down over the interval shown, and so is the dollar! So, how is gold going down an indicator that the dollar is about to rise? And once again you are relying upon the group mind of a gaggle of investors instead of making an original analysis from your own data. Gold is extremely volatile, and therefore not a good predictor over the short term. By contrast, the price of oil usually moves inversely to the value of the dollar - have you noticed what *that* is doing lately?

    Why do you ignore that the U.S. trade deficit is still 5.5 percent of GDP? The IMF World Economic Outlook Report for April, 2008 indicates that the deficit is not sustainable at levels about 2-3 percent. It was at 7 percent in 2005. Since then, the dollar has declined almost 20 percent, and we have only lost 1.5 percent of GDP from the deficit as a result. That would indicate (by my rough logic) that we have at least 30 percent more to hack from the dollar's value before the deficit can stabilize.

    Still plenty of ARMs to reset. Still a huge and growing unsold inventory of foreclosed homes. Citicorpse is selling potentially 400 BILLION in assets! Just how broke do you think they are to sell that much stuff? How much lending to the real economy do you think they will be doing under those circumstances?

    Oil producers are considering unpegging from the dollar. 6 trillion dollars are in foreign hands waiting to slurp our portable commodities out of the country, driving up prices, and to dump the rest on foreign exchange markets to get the currencies of nations possessing viable exports.

    You have cherry-picked the data, or simply made claims with no data, to support the dollar-positive thesis that you seem to have written on a blank piece of paper when you first conceived of this article.

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