As the dollar has spent some of this year recouping against a basket of major currencies, people are becoming unsure as to the fate of the greenback. Can the rally be sustained in the dollar and its exchange traded funds (ETFs)? How high can it go?

In four months, the dollar has strengthened against the euro by 23%, 34% against the British pound, and even more against some other developing countrys’ currencies, reports Joanna Slater for The Wall Street Journal.

As it turns out, extreme financial distress has caused investors to seek refuge in world’s reserve currency and in U.S. Treasury bonds. Investors are wary that this comeback may be short-lived considering challenges in the U.S. economy, but it is likely to continue into the next year.

Investors are concerned over the possibility of future rampant inflation and a situation where foreign investors could scale back or completely stop buying U.S. assets, in which case the dollar would spiral downward along with rising interest rates.

One way to protect oneself from fluctuations in the dollar would be to own stocks or bonds denominated in other currencies. A potential investor may also consider bull or bear dollar ETFs, depending on your optimistic/pessimistic outlook, such as:

  • PowerShares DB U.S. Dollar Index Bullish (UUP): currently up 10.5% year-to-date

ETF UUP performance

  • PowerShares DB U.S. Dollar Index Bearish (UDN): down 9% year-to-date

ETF UDN performance

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.

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