Dollar ETFs: Why Foreign Countries Want To See Strength

The U.S. dollar is once again under scrutiny. The G-7 discussed possible changes that would affect global currencies at its meeting this week. Their decisions could someday have an impact on currency-focused exchange traded funds (ETFs).

Although there are bragging rights associated with a stronger currency, a weaker currency bodes well for exporting countries. The G-7 meeting in Istanbul talked about how currencies will impact the recovery of their own economies as well as the global economy, writes Bryan Rich for Money and Markets. Mostly, the G-7 wants to see a stronger U.S. dollar sooner rather than later.

Some currencies - the euro, the Canadian dollar, the British pound and the Japanese yen to name a few - appreciated on improvements in global economies, which means a weaker U.S. dollar. Global capital is moving out of the safety of the U.S. dollar and into the rest of the recovering world. (Read here to learn all about currencies).

Governments and central bankers have injected money to help their economies, but the appreciating currencies have counteracted the help. Export-dependent countries are seeing their domestic currencies rise against the world’s biggest consumer, the United States. Some countries are willing to take action to knock down the strength of their domestic currencies to ease their economic recoveries.

An interesting scenario that is occurring with the Japanese yen is the reversal of the carry trade. (What is it?) Investors are now favoring the carry trade with the dollar instead of the yen, and the dollar depreciated while the yen is appreciating.

• PowerShares DB U.S. Dollar Bullish Fund (UUP): down 8.2% year-to-date

• PowerShares DB U.S. Dollar Bearish Fund (UDN): up 7.4% year-to-date

• iPath Optimized Currency Carry (ICI): up 4.3% year-to-date

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