The U.S. dollar briefly touched its lowest level in three years on Friday, impacting gold and currency ETFs, as trade war tensions flared and foreign investors began pulling back from American assets.
The dollar tumbled even as U.S. bond yields surged, an unusual divergence that analysts at investment banking advisory firm Evercore described as “highly abnormal.” In a typical environment, higher yields tend to attract capital and boost the dollar. But recent policy uncertainty and growing trade frictions are spooking global investors.
As of midday Friday, the U.S. Dollar Index hovered around 100, the bottom of a trading range that’s held since 2022. It’s a precarious level, and where the dollar goes from here could have big implications across the ETF landscape.
Gold ETFs Shine
One clear beneficiary of dollar weakness is gold.
The yellow metal typically moves inversely to the greenback, and the recent slump has lit a fire under gold prices. On Friday, gold surged to a fresh all-time high above $3,200 per ounce, lifting its year-to-date gains to 23%.
That was great news for gold ETFs like the SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU) , both of which have seen renewed interest from investors seeking a safe haven amid rising volatility and falling confidence in the dollar.
Currency ETFs React
Currency-tracking ETFs are another group impacted by the dollar’s fall.
Funds like the Invesco CurrencyShares Japanese Yen Trust (FXY) and the Invesco CurrencyShares Euro Trust (FXE) have jumped as their respective currencies rallied against the dollar. Both are up about 9% year to date.
Conversely, the Invesco DB US Dollar Index Bullish Fund (UUP) —which aims to profit from dollar strength—has slumped more than 6% so far this year as the greenback lost ground.
Tide Turns for Currency-Hedged ETFs
Currency-hedged ETFs, coveted by investors during the dollar's bull run, are starting to lose their edge.
Funds like the WisdomTree Europe Hedged Equity Fund (HEDJ) and the WisdomTree Japan Hedged Equity Fund (DXJ) benefited when the dollar was climbing and currency headwinds ate into foreign stock returns. But now, with the dollar weakening, plain-vanilla international ETFs are outperforming their hedged counterparts.
If the dollar breaks down from its multi-year range, that trend could accelerate. Investors may increasingly favor unhedged international ETFs to benefit from currency tailwinds.
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