Don’t fight the Fed. As the Federal Reserve gradually turns off its quantitative easing program and begins thinking about raising benchmark rates, exchange traded funds that track the U.S. dollar will strengthen against other world currencies.
The Fed has tapered its $85 billion monthly asset purchasing plan down to $65 billion, signaling its intentions on shutting down the easing program this year, and fueled expectations of a tighter monetary policy by the second half of next year, reports Rahul Karunakar for Reuters. [Fed Action Helps Strengthen U.S. Dollar ETF]
“Real interest rates in the U.S. are going to rise and that is going to certainly decrease the (capital) flow outside of the U.S. into other economies,” Geoffrey Yu, a currency strategist at UBS, said in the article. “We have seen that trend in emerging markets already and are going to see it in other economies as well.”
Meanwhile, central banks abroad are adhering to loose monetary policies. For instance, analysts expect the Bank of Japan and the European Central Bank to continue with the easing programs to support their economies.
Investors interested in gaining exposure to the U.S. dollar have a couple of ways to play an appreciating greenback.