Currency ETFs: How Should You Evaluate Them Now?

Over the last twelve months, the overwhelming majority of major world currencies gained ground against the U.S. dollar. In fact, world currencies didn’t just garner marginal appreciation… they rocketed forward.

The CurrencyShares Australian Dollar (NYSE: FXA) socked away 40%. The Brazilian Real (NYSE: BZF) hoarded 32%. The CurrencyShares Canadian Dollar (NYSE: FXC) marched ahead for 25%. Even the much-maligned euro, well… CurrencyShares Euro (NYSE: FXE) still managed 7.5% year-over-year.

One year ago today, though, the entire invesmtent community had been shell-shocked by the credit collapse, flocking to the greenback as a perceived safe haven; in essence, March of 2009 (one year ago) is when the U.S. dollar reclaimed 3 years of losses that dated back to January ’06!

However, circumstances have changed a bit since the start of 2010. Here are the approximate gains or losses for a variety of currencies versus the U.S. dollar.

Popular Currency ETFs Versus The U.S. Dollar (1/1/10-Present)
			Approx %
CurrencyShares Canadian Dollar (FXC)			3.6%
CurrencyShares Yen Trust (FXY)			3.0%
CurrencyShares Australian Dollar (FXA)			2.9%
WisdomTree Indian Rupee (ICN)			2.7%
CurrencyShares Swedish Krona (FXS)			0.3%
WisdomTree Brazilian Real (BZF)			-0.8%
CurrencyShares EuroTrust (FXE)			-4.9%
CurrencyShares British Pound (FXB)			-5.6%

In spite of the commonly cited “dollar strengthening” phenomenon, it’s far from a universal occurrence. There are economies with impressive GDP growth where the currency (e.g., India’s rupee, etc.) is still appreciating against the greenback. Developed markets in the process of gradual tightening also have dollars (e.g., Australia, Canada, etc.) that continue to outpace Uncle Sam’s paper. Even the most embattled economy (i.e., Japan) has its yen winning the currency shuffle.

When you look at the U.S. dollar versus a basket of international currencies, 50% or more which are European, it is here where the U.S. dollar has had its edge in 2010. Italy, Greece and Spain have all been battling a perception that one or more EU countries could conceivably default on debt obligations. And then in Great Britain, well… not much has been going right there either!

Still, I anticipate Currency Shares Euro (NYSE: FXE) will stabilize, so I wouldn’t bet against it. CurrencyShares Yen (NYSE: FXY) and CurrencyShares British Pound (NYSE: FXB) may depreciate in value from here, and that may bolster the buck somewhat.

That said, I don’t expect the ride for either the Canadian dollar (NYSE: FXC) or the Australian dollar (NYSE: FXA) to end this year. Both countries have strong GDP growth prospects and stronger Central Bank policies that the U.S.; both Currency ETFs are still 10% off their peaks from 2007 and 2008. Canada has a lot going for it right now!