An exchange-traded fund (ETF) that is designed to provide investors with exposure to a single currency or a basket of currencies. The financial resources of the funds are pooled to provide exposure to the underlying currency (currencies) by tracking its (their) performance against a certain currency or a basket of currencies.
In its simplest form, an ETF might be backed by bank deposits in a foreign currency. Other more complex currency ETFs involve purchase of currency derivatives (particularly, currency forwards and currency swaps, which give the buyer the right to exchange a certain currency at a predetermined date) to establish foreign currency exposure.
Selection of a currency ETF depends on multiple factors that impact the value of currencies used, such as interest rates, central bank measures and intervention in the foreign exchange market, dynamics of international trade (currency supply and demand), among others.
