The U.S. dollar’s rally reversed course last week. While the Federal Reserve policy changes could help support the greenback over the long-run, traders can utilize inverse USD-related exchange traded funds to hedge any short-term turns.
Over the past week, 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, dipped 0.9%.
Meanwhile, 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, gained 0.9% over the past week. Additionally, for the more aggressive traders, the PowerShares DB 3x Short US Dollar Index Futures ETN (NYSEArca: UDNT), which tries to provide a -300%, or three times the inverse, returns of the U.S. dollar, increased 2.7%. [Profit From a Falling Dollar With These ETFs]
Currency traders have been building up their U.S. dollar exposure over the past few months, writes Chiara Albanese for the Wall Street Journal. Consequently, any slight negative outlook could shake the crowded trade.
In normal market conditions, the growth-sensitive Australian dollar would have depreciated against the greenback during a sell-off on global growth concerns. However, the Aussie appreciated against the USD last week despite the selling on global weakness, which suggests that the extreme run up in the dollar or run down in the Aussie could have been a factor.
Other traders are also growing wary over the crowded bet on the U.S. dollar.