U.S. dollar exchange traded funds have rallied this year, and with the an expanding economy and supportive policy changes ahead, the greenback could continue to advance against other foreign currencies.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the largest dollar-related ETF, has strengthened 8.3% year-to-date. UUP tracks the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
For a slightly broader foreign currency exposure, the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) has been gaining investment interest and is up 6.3% year-to-date. The actively managed USDU tracks a broader basket of developed and emerging market currencies, including the euro, yen, Canadian dollar, Mexican peso, pound sterling, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real. [Dollars Flow Into This Dollar ETF]
The Federal Reserve has ended its bond purchasing program and is expected to hike rates next year, providing traders with a bullish outlook on the dollar, reports Constance Gustke for CNBC.
The fall in energy prices and the country’s diminished reliance on oil imports have also helped support USD gains. If we were importing more oil, we would be selling the U.S. dollar to purchase the foreign goods.
Moreover, the U.S. economy has been steadily strengthening, whereas other developed economies, notably the Eurozone and Japan, have been limping along. Some Forex observers, though, warn that the USD may be a crowded trade after the recent run up, which may leave it vulnerable to short-term volatility.
“U.S. dollar speculative positioning is increasingly becoming a very crowded trade, which leaves it more vulnerable to pullbacks in the near term on the back of disappointing economic data from the U.S., which acts to dampen Fed rate-hike expectations,” Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi, said.
John Kicklighter, chief strategist at DailyFX.com, argues that the greenback will remain strong over the next few years as the currency is considered a safe-haven play, especially in times of turmoil. Meanwhile, other major economies, like Japan and the Eurozone, have shown weakness, which “gives the dollar another advantage,” Kicklighter said in the article.
ETF traders can also capitalize on the turn in the Japanese yen and European euro. For instance, the ProShares Short Euro (NYSEArca: EUFX) is designed to provide 100% of the inverse, or opposite, return of the U.S. dollar price of the euro, on a daily basis and the ProShares UltraShort Euro (NYSEArca: EUO) provides 200% of the inverse return of the U.S. dollar price of the euro on a daily basis. EUFX rose 8.6% year-to-date and EUO increased 18.2%. Additionally, the ProShares UltraShort Yen (NYSEArca: YCS), which tries to reflect the daily -2x or -200% daily return of the USD/JPY currency pair,gained 22.8% so far this year. [Catalysts for Dollar ETFs]
The inverse euro currency options may be a good hedge if the Eurozone finds itself in a triple-dip recession.
“There’s a good probability that the euro zone will suffer another recession before the euro stabilizes,” Kicklighter added.
For more information on the USD, visit our U.S. dollar category.
Max Chen contributed to this article.