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Currency ETFs Spell More Trouble


The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- The motion picture, "Contagion," tracks the movement of a lethal virus that kills millions in a matter of days. Will the worldwide community come up with a cure? Or will the pandemic spread, annihilating every creature in its path?

I don't know the answer -- I haven't seen the movie. In fact, I don't even plan to see the film because I feel like I've seen it before.

Perhaps ironically, many are asking if the poisonous sovereign debt of the PIGS (Portugal, Italy, Greece, Spain) will cause a global meltdown in equities -- the same way that toxic subprime mortgages did. For all the naysaying, it seems that the stock markets won't relax until Europe comes up with a credible TARP program to bolster the European banks -- the same way U.S. TARP supported U.S. banks.

In spite of a three-day stock rally where the S&P 500 is once again testing the psychological resistance level of 1200, the European credit crunch that I've been writing about for months is getting worse. (See August's, " Without Bailing Out European Banks, These ETFs May Be Toxic.")

Indeed, three-Month LIBOR rates climbed above a long-term moving average in mid-August -- and they just keep climbing. In fact, it is 40% more expensive for European banks to borrow from one another than it was on the Fourth of July.

Some folks may like to believe that the "Euro-mess" can be contained within its borders. After all, the S&P 500 is only down 5.6% year-to-date. Hardly a catastrophe, right?

Unfortunately, currency ETFs are telling a different story. Whereas the euro-dollar has been weak for months, the "contagion" appears to be spreading to emerging-market currencies. Investors are fleeing local safe havens for more traditional ones -- like the greenback, the yen, and U.S. treasury bonds.

Asian currencies, for example, held particular appeal, when the world seemed down on the buck. Now that the fears are intensifying, the world's reserve currency is regaining its "almighty" namesake.

Over the previous month, the U.S. dollar and U.S. stocks show greater relative strength than the emerging markets or their currencies. Unfortunately, this isn't a sign of success; rather, we're likely to see even more trouble ahead.

1 Month Performance For Popular Currency ETFs
Approx 1-Mo %
PowerShares DB Dollar Bullish (UUP) 1.7%
CurrencyShares Yen Trust (FXY) 0.8%
CurrencyShares Canadian Dollar (FXC) -1.1%
CurrencyShares Australian Dollar (FXA) -2.0%
CurrencyShares British Pund (FXB) -3.7%
WisdomTress South African Rand (SZR) -4.5%
CurrencyShares Euro (FXE) -4.8%
CurrencyShares Russian Ruble (XRU) -5.0%
WisdomTree Indian Rupee (ICN) -5.4%
WisdomTree Brazilian Real (BZF) -7.7%
CurrencyShares Swiss Franc (FXF) -10.3%

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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