Foreign Borrowers Could Fuel Dollar ETFs’ Rally

The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) are up 9.4% and 6.3%, respectively this year.

Those gains come after UUP and the actively managed USDU climbed an average of 10.5% last year, enough to give some investors pause about how much more upside the U.S. dollar has against rival currencies. Dollar bills will be heartened to know catalysts remain that could power the greenback and that the dollar’s run may not be close to being over.

“Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years,” reports Anchalee Worrachate for Bloomberg, citing data from the International Bank of Settlements.

Though the dollar has sputtered recently, market observers view that lethargy as temporary, particularly as the Federal Reserve prepares to lift interest rates. As Bloomberg reports, global central banks are returning to the dollar, which could prompt a raft of short covering, potentially lifting the currency.

The combination of the Fed raising rates, other central banks accumulating dollars and sovereign borrowers needing to repay debt denominated in a dollar that is now stronger than when they took those loans could become a perfect storm for UUP and USDU. [Buying the Dollar ETF Dip]

Data suggest investors are betting the dollar’s rally is still in the early innings. For example, nearly $303 million of new assets have been added to UUP this year, good for the fourth-best total among all PowerShares ETFs, according to issuer data.

Investors are also upping bullish bets that tumbling foreign currencies, such as the euro and yen, will bolster equities in those regions.