Here’s Your Ultimate Guide to Trading the Weak Dollar


A perfect storm of forces is lining up against the U.S. dollar. Here are some key things for investors to know.

First, even if you don’t trade currencies (and most people don’t), they can have a big influence on the stock market. Moves in the foreign-exchange markets impact companies operating outside the U.S. They can also move commodity prices and related stocks.

Second, dollar weakness may remain a big story as the U.S. recovers from coronavirus more slowly than the rest of the world. It might also be in focus this week because the Federal Reserve is expected to keep interest rates low and signal more of the same in the future. Europe and China are moving in the opposite direction, boosting the euro and yuan against the greenback.

Weak-dollar investments fall under one of three categories:

  1. Country and currency ETFs
  2. Commodities and related ETFs
  3. Global stocks

We’ll consider each group in more detail.

Country and Currency ETFs

Several exchange-traded funds (ETFs) are associated with foreign countries. Most track stock indexes on other nations, although some also follow their currencies.

Because these ETFs are linked to foreign assets, they can gain value in dollar terms when the U.S. currency loses value. Inversely, they can lag at times when the greenback moves higher.

  • The iShares Emerging Markets ETF (EEM) is the most actively traded global-stock fund by a wide margin. It holds shares in foreign companies, mostly in Asia. About 40 percent of its assets are in China, 12 percent are in Taiwan and 11 percent are in Korea. Brazil’s next at 5 percent. Emerging markets tend to be more volatile than the U.S. or Europe. They generally outperform when investors want to take risk, but may fall more sharply at times of fear.
  • The iShares MSCI Brazil ETF (EWZ) is the most volatile of the major country ETFs. It entirely focuses on Brazil, Latin America’s largest economy.
  • The iShares China Large-Cap ETF (FXI) tracks major Chinese companies trading on the Hong Kong Stock Exchange.
  • The iShares MSCI EAFE ETF (EFA) tracks major developed countries (Europe and Japan). It’s less volatile than emerging markets.
  • Invesco U.S. Dollar Bull (UUP) tracks the U.S. dollar against other currencies. It’s the only item on this list that moves in the same direction as the greenback.
  • Invesco Currency Shares Euro Trust (FXE) tracks the euro currency rather than company shares.

Investors should always understand currency risks when trading these securities. Rebounds in the U.S. dollar could hurt all of these funds except UUP.

Commodities and Related ETFs

Given the U.S.’s dominant role in modern world history, most commodities are transacted in dollars. As a result, declines in the greenback increase the dollar-denominated value of physical commodities because it takes more dollars to buy the same amount of the product. While this applies to many items, precious metals are now the main commodities that actively trade in relation to the U.S. dollar. (Oil has mostly lost its correlation to the the dollar.)

  • SPDR Gold Trust (GLD) tracks the price of physical gold. Each share represents one-tenth of an ounce.
  • iShares Silver Trust (SLV) tracks the price of physical silver. Each share represents approximately one ounce.
  • Market Vectors Gold Miners ETF (GDX) tracks the price of gold mining companies. Because of their obvious link to gold prices, gold miners tend to follow the price of metals. However, the correlation occasionally breaks down.

Investors should always remember that commodity-related ETFs are dependent on supply and demand for a physical product. They have historically lagged equities because metals cannot innovate or create wealth (unlike companies). However there are times when they outperform — especially when the economy is weak like now.

Global Stocks

Many foreign stocks trade directly in the U.S. and can be bought or sold in a TradeStation account. They can move based on their own company news, along with possible currency-related reasons. Here are some of the largest and most active:

  • Alibaba (BABA) is the most valuable foreign stock available to U.S. investors. It’s the “Amazon of China.”
  • Taiwan Semiconductor (TSM) is the world’s biggest chip maker by market capitalization. It’s a major player in the global electronics and computing industries.
  • Toyota Motor (TM) is the world’s No. 2 automaker by volume.
  • ASML (ASML) is the world’s most valuable supplier of chip-making equipment. It’s based in the Netherlands.
  • BHP (BHP) is a large British-Australian mining company that produces copper, iron ore, petroleum and coal.
  • Rio Tinto (RIO) is a large British mining company. Its products include copper, gold, silver, iron ore and aluminum.

Investors should always remember that individual stocks have company-level risk. They have quarterly reports, product cycles and management teams. These factors can also impact their performance.

In conclusion, currencies are starting to move after a long period of stability. Now could be the time for investors to start understanding how a weak dollar impacts the stock market.

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