Signs of an improving economy are helping the U.S. dollar and currency-related exchange traded funds recover from a two-month sell-off.
Since the May 15 lows, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has gained 4.6%. Additionally, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU), which tracks the USD against a broader basket of developed and emerging market currencies, has increased 3.8%. [Recent Weakness in Dollar ETFs Only a Minor Setback]
Robin Brooks, Goldman Sachs Group’s chief currency strategist, argued that the period of weakness in the U.S. dollar is over, as long as economic data is “half-way decent,” reports Rachel Evans for Bloomberg.
“The market is once again under-positioned on the long U.S. dollar theme and will continue to play catch-up,” Brooks told Bloomberg.
Currency traders have diminished bets on the USD to the lowest level since September after the greenback depreciated 6% from the mid-March high in response to poor economic reports.
However, investors could be repositioning as the government release more favorable economic data ahead, with core inflation accelerating at a faster-than-expected pace.
Brooks also believed that American data will look better, compared to the worsening economic outlook in Europe.
Additionally, Brown Brothers Harriman & Co.’s Marc Chandler contended that the dollar strength will continue on the diverging monetary policies between the U.S. and Eurozone.
“We expect the market to refocus on the European ‘growth crisis’ in coming weeks, continuing to pull euro-dollar down,” analysts led by Brooks said in a note. “We continue to see risk-reward biased in favor of a stronger dollar.”
Currency traders who are looking to profit off weakness in the EUR ahead can utilize inverse euro-currency ETF options as well. For example, the ProShares Short Euro (NYSEArca: EUFX) provides 100% of the inverse or opposite return on the U.S. dollar price of the euro. The ProShares UltraShort Euro (NYSEArca: EUO) provides 200% of the inverse return of the U.S. dollar price of the euro. Lastly, the Market Vectors Double Short Euro ETN (NYSEArca: DRR) also provides a -200% exposure to the euro. Over the past week, EUFX rose 2.5%, EUO gained 5.1% and DRR increased 6.4%.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on the USD, visit our U.S. dollar category.