U.S. Dollar ETFs’ Moment to Shine
August 1st, 2014 at 7:30am by Tom Lydon
The U.S. dollar exchange traded fund is on a roll, with the dollar index trading near its highest level in a year.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, rose 2.1% over the past month and is up 0.9% year-to-date.
Alternatively, an actively managed option, WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU), which currently tracks the USD against the euro, yen, Canadian dollar, U.K. sterling, Mexican peso, Australia dollar, franc, South Korean won, Chinese yuan and Brazilian real, is up 1.4% over the past month but down 0.7% year-to-date.
The U.S. dollar index is up 2.2 over July, its best monthly performance in 17 months as traders anticipate the Federal Reserve will tighten its monetary policy and a better-than-expected second quarter GDP expansion bolstered the currency, reports Patti Domm for CNBC. [Dollar ETF Finds Support From Outperforming Economy]
“This is what everybody’s been waiting for,” Marc Chandler, chief currency strategist at Brown Brothers Harriman, said in the article. “No matter what currency you look at, the dollar is trading at higher levels. The euro is falling because shorts are jumping in, and sterling is falling because longs are liquidating. What’s driving this is the Federal Reserve is moving towards its mandate, which will allow it to raise rates next year.”
The Fed’s diverging policies, compared to other central banks, will continue to support the greenback.
“Not only is central bank policy diverging, interest rates are diverging, and we’re going to learn GDP is diverging,” said Chandler. “The divergences between the U.S. and euro zone is a long time coming, and people expect that to drive the dollar higher against the euro and now it’s beginning to kick in.”
Once the Fed implements tighter monetary policies, the U.S. dollar will strengthen on the tighter supplies. Meanwhile, overseas central banks are loosening their monetary policies, or increasing the supply of their domestic currencies, which would help depreciate their currencies against the dollar.
Jens Nordvig, global head of G-10 currency strategy at Nomura, anticipates the August through October period will be crucial to the U.S. dollar since the Fed will likely hint at a shift in policies ahead. Alan Ruskin, head of G-10 currency strategy at Deutsche Bank believes the dollar is in a moderate bull cycle and could push 5% higher against other major currencies over the next 12 months.
The more aggressive trader can utilize a geared fund product to gain a leveraged-long position in U.S. dollar moves. The PowerShares DB 3x Long US Dollar Index Futures ETN (NYSEArca: UUPT) provides a leveraged 300% bullish monthly return to the U.S. dollar futures index. UUPT is up 2.3% year-to-date.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.