Currency ETFs: Dollar Rallies to Key Resistance, Threatens Breakout

May 16th at 11:11am by John Spence

An exchange traded fund pegged to the U.S. Dollar Index is on an 11-day rally as the greenback nears a key resistance level. If the dollar breaks out, it could mean pain for ETFs tracking stocks and other risk assets.

The Dollar Index is on its longest winning streak in more than 20 years on fears the recent elections in Greece will result in the financially troubled country finally leaving the euro, MarketWatch reports.

PowerShares DB US Dollar Index Bullish (NYSEArca: UUP) was little changed on Wednesday morning. The ETF follows the movement of the greenback versus a basket of currencies.

Technically, the Dollar Index has encountered heavy resistance near 82 since the beginning of 2011. A breakout would be worrying for equity bulls because stocks and the dollar have shown a strong inverse correlation.

The latest debt flare-up in the Eurozone has pushed the dollar higher and the euro lower as investors favor safe havens.

Greek banks have experienced steady outflows this month amid uncertainty about the country’s future in the euro, according to a Financial Times report.

“Speculation about an endgame in Greece’s protracted crisis has flooded markets with euro exit scenarios this week, but investors reckon there’s still every chance that uncertainty will simply drag on for months,” Reuters reports.

The euro has tumbled to four-month lows and the U.S. dollar could be on the verge of a “massive breakout,” says Christopher Vecchio, currency analyst at DailyFX.

“As the Greek government failed to reach consensus and form a coalition government, the EURUSD has broken to fresh four-month lows at 1.2721, the pairs lowest such exchange rate since January 17,” he said in a note. “With the Merkel/Hollande press conference providing little support for the berated currency, the euro looks to be pressured lower … now that other periphery countries, mainly Ireland, Italy, Portugal, and Spain, have started to see their short-term funding costs rise.”

U.S. Dollar Index


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers

UUP