Since 2002, the U.S. Dollar has lost more than 30 percent of its value relative to other world currencies. Shorting the U.S. dollar and buying other world currencies is one way to make money from this trend. Instead of playing the very risky and complicated foreign exchange markets, these exchange traded funds make it easy to short the U.S. dollar or go long foreign currencies. Now, you can buy euros, yen, pesos and pounds just as easily as you would buy a stock.
PowerShares DB U.S. Dollar Index Bearish Fund (UDN) gives you exposure to all the major world currencies and is designed to replicate a short position in the USDX, an index that tracks the U.S. dollar against the Euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.1%), Swedish Korona (4.2%) and Swiss franc (3.6%).
In other words, UDN goes up as the U.S. dollar goes down against this basket of other major currencies. PowerShares DB U.S. Dollar Index Bullish Fund (UUP) allows you to take the opposite position as the UDN. This one goes UP as the currencies mentioned above fall when measured against the greenback. CurrencyShares British Pound Sterling Trust (FXB) is an ETF that holds a position in the United Kingdom’s currency, the pound. CurrencyShares Japanese Yen (FXY) gives you a chance to profit when the Japanese yen is outpacing the dollar. The ProShares UltraShort Yen (YCS) is a bearish yen fund. It’s 2X leveraged, so your gains are amplified if your bet is correct. If the yen drops 10 percent, this ETF’s shares stand to rise 20 percent.
However, if you’re wrong, your losses can add up quickly. The PowerShares DB G10 Currency Harvest Fund (DBV) tracks an index that shifts exposure based on the yield of the ten top world currencies in the world — the G10. With DBV, you’ll have the equivalent of a long position in the three highest-yielding G10 currencies and a short position in the three lowest-yielding G10 currencies. If you know anything about hedge funds, you probably recognize this as the so-called “carry trade.” Put simply, it’s borrowing at low interest rates and using the loan to buy higher yielding assets elsewhere. It was an easy way to make big bucks for years. But those managers had their heads handed to them in 2008.