The U.S. dollar has been falling lately as interest rates decline and traders ratchet up their bets on Fed rate cuts for early next year.
But not every currency has risen against the greenback over the past month. The Japanese yen bucked the trend to hit a 33-year low versus the dollar earlier this week.
The yen has been trending lower for close to two years as the Bank of Japan stubbornly holds onto its ultra-low interest rate policies despite the highest levels of inflation in decades.
The BoJ’s policies have been the polar opposite of other central banks, which have swiftly hiked rates to combat sizzling consumer prices.
Not even the prospect of lower rates in the U.S. has stemmed the bearishness surrounding the yen, though that could change if markets begin to price in more significant Fed rate cuts than they are today.
The $228 million Invesco Currencyshares Japanese Yen Trust (FXY) has fallen by 12% in 2023, while bargain hunters have added $76 million to the ETF so far this year.
Yen Decline and Currency Hedged ETFs
Funds tied to currencies aren’t the only ones impacted by the yen’s plunge to a 33-year low. Japanese equity ETFs, like the $13 billion iShares MSCI Japan ETF (EWJ), have been hurt by the drop in the currency as well.
Sure, EWJ is up 13.8% so far this year, but that sharply lags the nearly 30% gain for the MSCI Japan Index priced in yen. In other words, for U.S. investors, the decline in the yen has chopped off nearly half of the gains for EWJ.
ETFs that hedge currency exposure have fared better. iShares Currency Hedged MSCI Japan ETF (HEWJ) is higher by over 34%, while the WisdomTree Japan Hedged Equity ETF (DXJ), which also hedges currency exposure while tilting its portfolio towards companies that benefit from a weaker yen, is up by nearly 40%.
Currency hedged ETFs tend to outperform when the dollar is rising, while they underperform when the dollar is falling.
