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Top Currency Funds Bet Against Dollar

At 9.2% year-over-year, U.S. producer price inflation in June spiked to the worst in 27 years. Prospects for American businesses, stocks and fixed-income investments remain suspect.

In this climate, the best-performing currency funds in the second quarter were those betting on currencies that performed relatively well versus the greenback.

The best-performing currency fund from March 31 to June 30 is the CurrencyShares Australian Dollar Trust (FXA). The fund is designed to measure the amount of U.S. dollars needed to buy an Australian dollar. So, as the U.S. dollar declines in value, it takes more and more of our dollars to buy the Aussie variety.

The spot value weakened by 4.75% in the second quarter, sending the fund up by 6.71%.

The second-place currency fund is the CurrencyShares Mexican Peso Trust (FXM). As pesos per dollar shrank 3.13% for the period, this fund gained 5.18% on dollar weakness against the Mexican peso.

Both of the above funds are direct plays on specific currencies. If the U.S. dollar strengthens against these two foreign currencies, then these funds are designed to lose money. On the other hand, this next fund tracks an index attempting to determine which currencies are set to appreciate.

The third-place fund, PowerShares DB G10 Currency Harvest Fund (DBV) improved by 5.10% in the second quarter, tracking the Deutsche Bank G10 Currency Future Harvest Index.

The theory behind the index is that currencies of countries with relatively high interest rates tend to rise while those of relatively low interest rates tend to fall. Futures contracts are bought for bullish currencies and sold short for currencies expected to weaken.

Changes in Select World Currencies per U.S. Dollar
Spot Currency Ticker 2nd Quarter Change US Dollar
JAPANESE YEN JPY 6.54% Stronger
SWISS FRANC CHF 2.82% Stronger
SWEDISH KRONA SEK 1.19% Stronger
EURO EUR 0.21% Stronger
MEXICAN PESO MXN -3.13% Weaker
Source: Bloomberg

Currently the fund's bullish, long position is allocated to one-third each of Australian dollars, New Zealand dollars and Norwegian krones. Plus, the bearish, short position is split to one-third each among U.S. dollars, Japanese yen and Swiss francs.

The four other currencies that can be, but are not currently being, traded include the euro, Canadian dollar, British pound and Swedish krona.

Best-Performing Currency Funds in the Second Quarter
Fund (Ticker) Rating Total Return 2nd Quarter Fund Type
CurrencyShares Australian Dollar Trust (FXA) A+ 6.71% ETF
CurrencyShares Mexican Peso Trust (FXM) A+ 5.18% ETF
PowerShares DB G10 Currency Harvest Fund (DBV) C+ 5.10% ETF
ELEMENTS Linked to the Australian Dollar/U.S. Dollar Exchange Rate ETN (ADE) U 2.67% ETN
Barclays GEMS Index ETN (JEM) U 1.68% ETN
iPath EUR/USD Exchange Rate ETN (ERO) A+ 1.60% ETN
CurrencyShares British Pound Sterling Trust (FXB) A 1.46% ETF
CurrencyShares Canadian Dollar Trust (FXC) B+ 1.02% ETF
iPath Optimized Currency Carry ETN (ICI) U 0.93% ETN
ELEMENTS Linked to the Euro/U.S. Dollar Exchange Rate ETN (ERE) U 0.92% ETN
Source: Bloomberg

For an explanation of our ratings, click here.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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