The recovering U.S. economy, the Fed’s gradual tapering and loose monetary policies abroad should have helped strengthen the U.S. dollar and related exchange traded fund, but so far this year, the greenback has been enervated.
The PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP), which tracks a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has declined 1.7% year-to-date and is down 5.4% over the past year.
The U.S. Dollar Currency index is trading below the critical 80 level, its lowest since last October, reports Sara Eisen for CNBC. Meanwhile, the euro currency is at a seven-week high and the British pound is trading around its highest since August 2009. [Currency ETFs Struggle to Keep Pace With Industry Growth]
The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is up 1.1% and CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) gained 2.4% year-to-date. [Potential Sterling Slippage Spotlights These ETFs]
Observers point out that a number of factors are weighing the USD. For instance, the weaker-than-expected economic signals, such as the 0.1% first quarter GDP, declining labor force participation rate and low inflation, will weigh on the Fed outlook and reduce the likelihood of monetary tightening.
Currency traders also cite the growing demand for European assets, namely new debt issuance from formerly beleaguered peripheral states. The increased demand for EU debt means greater demand for the currency to purchase euro-denominated bonds.
“The (currency) market will probably react more to that (demand for European assets), than to any further move in relative rates,” Kit Juckes, currency strategist at Societe Generale,said in the article.
Looking ahead, strategists argue that the U.S. dollar could continue to weaken unless the economy shows significant strength, along with higher interest rates.
Investors who are pessimistic about the dollar’s outlook can take a bearish stance on the currency with the PowerShares DB US Dollar Index Bearish Fund (NYSEArca: UDN), which tracks the inverse, or short, performance of the U.S. dollar against the same basket of six major currencies. UDN is up 1.4% year-to-date and up 4.2% over the past year.
PowerShares DB US Dollar Index Bullish Fund
For more information on the USD, visit our U.S. dollar category.