U.S. dollar and currency-related exchange traded funds have turned around this year and could keep their momentum going as shifting supply and demand dynamics will continue to support the greenback.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) increased 9.9% year-to-date. [Global Currency War Leaves U.S. Dollar ETFs On Top]
Meanwhile, the U.S. Dollar Index (DXY) is up 10.7% year-to-date.
“The strong U.S. dollar may have a lot further to run,” according to BlackRock analysts. “The law of supply and demand is at work here.”
Specifically, the analysts point to the diminishing pool of U.S. dollars. The U.S. current account deficit is shrinking – we are importing less, so we are exchanging less USD for foreign currencies, due to the lower need for oil imports. Additionally, the Federal Reserve ended its quantitative easing program, which cut the supply of dollars by $750 billion per year.
On the demand side, the U.S. dollar is becoming more attractive. With the Fed expected to hike rates while others like the Bank of Japan and the European Central Bank are adding QE, the diverging monetary policies will likely promote further demand for USD-denominated assets.