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ETF Specialist

ETFs for a Declining U.S. Dollar

How to be smart when betting on a declining dollar.

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Many investors anticipate that the U.S. dollar will continue to weaken. Critically, the Federal Reserve is holding short-term real interest rates below inflation. The interest rate can be thought of as the cost of money; low rates make dollars less valuable. Some emerging-markets countries, notably China, are artificially depressing their currencies in order to boost exports. Pursuing this mercantilist policy has stoked inflation in their economies. There will come a point at which the inflation becomes unbearably costly, and some market observers already see signs of inflationary stress. A sure way these countries can ease inflationary pressures is to allow their currencies to appreciate, which would further weaken the dollar.

A currency is essentially a short-term IOU, and to the extent that foreign governments hold them in reserve indefinitely, those are debts that the United States issued and for which it received goods that it never has to pay back. That free ride may be coming to an end. As pointed out by fund manager Axel Merk, China has been shedding its massive U.S. Treasury holdings. The country, which is slowly opening up its currency to foreign markets, has even called to replace the dollar as the reserve currency with a super-sovereign currency similar to the Special Drawing Right issued by the International Monetary Fund. John Lipsky, acting Managing Director of the IMF, suggested in a recent speech that the yuan will become a candidate for inclusion in the SDR basket. If the U.S. doesn't get its fiscal house in order, the death of the dollar's reserve-currency status may come to pass, which would further push down the dollar.

Michael Rawson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.