The U.S. dollar and related currency exchange traded funds will likely continue to strengthen as traders front-run the Federal Reserve.
Year-to-date, 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 4.4%. 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 3.4% so far this year. [Why You Shouldn’t Bet on Weaker USD Currency, ETFs]
Goldman Sachs anticipates further gains in the greenback, which could appreciate as much as 20% against the euro currency by the end of 2017, reports Chiara Albanese for the Wall Street Journal.
“One reason for this are U.S. data, which we think are rebounding strongly, with the second quarter tracking at 3.1%,” Robin Brooks, a Goldman Sachs analyst, said in the WSJ article, pointing to a path of policy normalization in the U.S.
Brooks believes the USD will continue to strengthen regardless of when the Fed decides to raise interest rates since currency traders know that a rate hike is inevitable.
Michala Marcussen, global head of economics at Societe Generale Corporate & Investment Banking, also contends that attention is back on the Fed as well.
“Ultimately we think the relative stance of monetary policy is going to be one of the most important drivers of euro/dollar over the coming months,” Marcussen said on CNBC. “And in that context we do think euro/dollar could come back and start testing parity at some point in time.”
Over the short-term, Goldman argues that currency volatility will be centered around a potential breakdown in negotiations between Greece and creditors. The EUR has been trading lower, despite the positive Greek news so far, as traders utilize the euro in a carry trade – the Eurozone has some of the cheapest interest rates – to fund bets on riskier markets.
Moreover, even if a Greek deal is signed, Goldman anticipates only a small move in the euro against the dollar “in the order of half to one big figure” since the markets are already positioned for a deal and will unlikely “address the growth crisis in Greece.”
“The Fed move is the bigger mover for euro/dollar than Greece at the moment. Greece makes for short-term volatility, but the bigger trends are the Fed, the U.S. economy,” Berenberg Bank’s Chief Economist, Holger Schmieding, told CNBC.
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 0.6%, EUO gained 1.2% and DRR increased 0.7%.
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.