Despite the recent hiccup, the U.S. dollar and related exchange traded funds could maintain its momentum in 2015 as diverging monetary policies overseas remains a dominant theme in the foreign exchange market.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) dipped 1.0% over the past week, but it is still up 8.3% year-to-date. [Improving Fundamentals to Support USD ETF]
Due to the improving U.S. economy, the Federal Reserve provided a strong signal that it will hike rates sometime next year but will remain “patient” in deciding when to raise interest rates, Reuters reports.
Meanwhile, other developed economies are enacting looser monetary policies. For instance, the Bank of Japan is implementing policies centered on a weaker yen, and the stubbornly low inflation rate in the Eurozone leaves the European Central Bank more room for stimulus measures.
Additionally, the Swiss National Bank is racing the ECB to the bottom, purchasing euros to defend its franc currency. Switzerland relies on its export industries, so the country has been depreciating its currency in response to heavy safe-haven demand.
However, in the emerging markets, the dollar may find more opposition as developing economies start auctioning off its foreign currency reserves to stem their depreciating currencies. For instance, Mexico, which has hedged its oil exports, is selling dollars to stabilize its peso currency. [Overseas Capital Flight Could Maintain Dollar ETF Strength]
On the other hand, China could also step in to depreciate the renminbi currency in an attempt to bolster the slowing economy.
Consequently, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU), which includes some emerging market exposure, could slow down if the emerging economies ramp up efforts to strengthen their own currencies. USDU includes a 9.1% tilt toward Mexico and a 3.0% weight toward China.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.