3 ETFs to Watch in the Great Currency War
By Eric Dutram of
The U.S. economy continues its painfully slow growth, but investors have begun to lose confidence in the once rock-solid greenback. This has pushed many investors into the relative safety of gold and other precious metals, many of which are breaking through or approaching all-time highs. Even the much maligned euro -- despite a patch of weakness earlier this week -- has seen a spike in its value, surging by close to 10% over the past three months. Given the ongoing troubles in the American market and that even the euro has been gaining against the dollar, it should not come as a surprise to many to find out that the dollar has also been struggling against a variety of more fundamentally sound currencies.
While some smaller countries, such as Switzerland and South Korea, have intervened in currency markets throughout the year, a number of larger markets have resorted to selling their home currency on the open market and using the proceeds to buy dollars. While this has a questionable long-term impact, few can argue that in the short term, this technique can produce the desired effect. Collateral damage is often felt throughout the home economy, though, as well as in the American markets. With a significantly weaker currency, emerging markets have greater difficult buying up commodities and other global products generally traded in U.S. dollars. Meanwhile, in the U.S., high costs from a strong dollar could prevent businesses from moving their operations here and price out American exports to international markets.
In normal market conditions this may fly under the radar, since the practices help keep commodity prices low and imports cheap and plentiful. But with an election coming up amid near double-digit unemployment, these practices have been put under the microscope by a host of U.S. politicians looking to win votes and secure manufacturing jobs. While there has been talk for years of "getting tough" on China's currency policies, Congress finally backed up its words with actions. In a rare bipartisan show of support, the House voted 348-79 to allow tariffs to be imposed on countries that chronically undervalue their currencies.Although the Senate is not expected to vote on the bill for some time, some are calling this a good first step on the road to helping the U.S. cut into its massive trade deficit with China. Others fear it will merely ignite a larger trade dispute as nations seek to win "a race to the bottom" in which their exports are the cheapest on the international market thanks to increasingly large currency devaluation programs. "Today we have another threat, which is that this willingness for consensus and cooperation has decreased. And we see around the world a possibility of the beginning of a currency war," said Dominique Strauss-Kahn, the head of the IMF, in the fall meeting of the organization. While many have engaged in these tactics over the past quarter, three nations stand out for their questionable currency practices due to the immense size of their economies and importance in world trade. Below, we profile three currency ETFs investors need to watch if this global currency war continues toward the end of the year:
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