The U.S. greenback has seen a stellar run so far this year, with Invesco DB US Dollar Index Bullish Fund UUP logging a 2.8% return. However, things may go downhill in the coming days, with the Fed expected to cut rates in September.

Market Forecast: Dollar Weakening Against Yen

Carry Trade Explained

Carry trades involve borrowing in a currency with low interest rates and investing in higher-yielding assets. This strategy has been popular due to expectations that the Japanese yen will remain weak and Japanese interest rates will remain low. However, recent interest rate hikes from the Bank of Japan have strengthened the yen, contributing to a global market sell-off.

Outlook for Yen Carry Trade Unwinding

The yen carry trade began to unwind earlier this month as Bank of Japan rate hikes bolstered the currency. Although some stabilization has occurred, strategists, including Yu, believe the unwinding process is ongoing.

Given the above-mentioned facts, the bearish trend in the greenback is likely to continue, at least in the near term.

ETFs to Buy for Weakening Dollar

So, investors looking to play the weakening U.S. dollar could consider these exchange-traded funds (ETFs):

Inverse Dollar Fund

Needless to say, if the dollar is falling, a short position on the currency would result in negative returns. Invesco DB US Dollar Index Bearish Fund UDN should thus be avoided.

Commodities: Gold

The decline in the U.S. dollar is good for raw materials and commodities as these are priced in the U.S. dollar. SPDR Gold Shares GLD has gained 21.7% this year due to a sudden dollar weakness and geopolitical tensions.

Large-Cap ETFs

Since large-cap stocks have greater foreign exposure, the weakening dollar is positive for this capitalization. BofA Global Research once estimated that every 10% drop in the U.S. dollar translates into about a 3% boost to S&P earnings. SPDR S&P 500 ETF Trust SPY should thus be closely watched.

ETFs to Sell for Weakening Dollar

U.S. Dollar

The dollar weakness can surely be played with UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.

Small-Cap ETFs

Since small caps are closely tied to the U.S. economy and do not get affected by a rising dollar due to their limited foreign exposure, iShares Russell 2000 ETF IWM could be a weak pick now, in this context.

Dollar-Denominated Bond ETFs

Investors seeking EM exposure amid a falling dollar should not consider dollar-denominated EM bond ETFs. These funds invest in sovereign debt from a variety of emerging nations via U.S. dollar-denominated securities. Notably, the debt route is less risky than equities. Moreover, most emerging markets have low debt levels compared to the developed countries.

SPDR Bloomberg Emerging Markets USD Bond ETF EMHC is one such ETF. The underlying Bloomberg Emerging USD Bond Core Index measures the performance of fixed-rate US dollar-denominated debt issued by sovereign and quasi-sovereign emerging market issuers. The fund yields 5.39% annually and is up 2.7% this year.

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