The U.S. dollar has suffered its fastest drop in years, with the index shedding 9% against a basket of global currencies—the largest decline since 2022.
If you’re concerned about continuing weakness in the U.S. dollar, there are a number of viable hedges, including foreign currency ETFs, which we’ll get to in a minute.
But first, let’s take a moment to explore what’s behind the recent weakness.
The chart below is the U.S. Dollar Index, which measures the strength of the dollar against a basket of six global currencies (the euro, the Swiss franc, the Japanese yen, the Canadian dollar, the British pound, and the Swedish krona). Stockcharts.com uses $USD for the index, but you’ll find it elsewhere under DXY.
As you can see, it’s declined from a value of 110 at the beginning of the year to just below 100 today. That’s the steepest decline since 2022, although the dollar has eased off a bit from its most recent low.
It should be noted that the dollar is still within a multi-year trading range dating back to 2022.
Despite the speed of the decline, we’re not exactly talking about a currency collapse.
What we are seeing, however, is a growing risk that the dollar could continue trending lower.
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The evolving tariff regime has, as you’re no doubt aware, injected a fresh bit of uncertainty into the market. But an increasingly chaotic economic policy may also be prompting governments and investors around the world to scale back the amount of business (and investing) that they’re interested in doing with the U.S.
The dollar’s status as the global reserve currency is partially premised on the desirability of doing business in the U.S., and that’s becoming more of an open question than it has been in recent history.
It’s unclear whether that trend has reached a temporary bottom (the dollar has strengthened a bit this week) or if it’s simply catching its breath as tariff concerns are perpetually delayed weeks at a time.
If you’re concerned that it’s the latter, there are a few ways you can hedge a weaker dollar. Gold has been particularly strong of late, and is likely to continue to be, especially if rate cuts are forthcoming.
You can also consider adding direct exposure to foreign currency, and two foreign currency ETFs look particularly attractive right now.
2 Foreign Currency ETFs to Hedge a Weakening Dollar
Both the Invesco CurrencyShares Swiss Franc Trust (FXF) and Euro Trust (FXE) have performed well this year, as the FXF is higher by 13.6% and the FXE is up 13.1%.
Cabot Explorer’s Carl Delfeld makes a strong case for investing in Switzerland in its own right, and it has long offered a safe-haven appeal for investors.
As for euros, the bloc has responded to the implementation of tariffs by trending towards coherence and has lately been presenting a more unified front. That stability is a notable value-add at a time of uncertainty.
Returns for either ETF are largely capped by the devaluation of the dollar, although the FXE does pay a modest dividend (1.7% over the last 12 months), so the potential here is entirely in the hedge.
That said, if the tariff rollout is a sign of what’s to come, and there’s a growing distaste for American assets, using a currency ETF as a partial hedge may be a wise move, especially if you’re considering spending any time overseas.
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*This post has been updated from a previously published version.
