Despite the recent hiccup, the U.S. dollar, along with currency-related exchange traded funds, has strengthened this year and will continue appreciating against foreign currencies.
Over the past week, 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 1.8%. 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, also rose 1.8%. Year-to-date, UUP returned 6.4% and USDU increased 4.8%. [Recent Weakness in Dollar ETFs Only a Minor Setback]
Meanwhile, the PowerShares DB US Dollar Index Bearish Fund (NYSEArca: UDN), which takes the inverse or short performance of the U.S. dollar against the same basket of six major currencies as UUP, dipped 1.7% over the past week and declined 8.3% year-to-date.
Kathy Lien, a foreign exchange strategist and managing director of BK Asset Management, argues that the bullish cycle in the U.S. dollar is only getting started, so traders should not try to bet against the greenback, reports Amanda Diaz for CNBC.
“The trade here is to ride the dollar higher,” Lien said on CNBC.
Fueling the improving U.S. dollar outlook, the Federal Reserve is more likely to hike rates, and Lien believes the improved housing and economic data will support a September hike. [An Improving Economy to Sustain U.S. Dollar ETF Strength]
“I think that the Fed tightening story is the main one that is going to continue to drive the dollar,” Lien added. “At the end of the day, data is improving and the language from the Federal Reserve is very consistent. They are going to raise interest rates. So I do think the greenback moves higher.”
However, Lien warned that the dollar rally could slow after the hike.
Additionally, a potential pullback in the Chinese equities market could “drive demand for dollars,” according to Lien. China could also loosen capital controls, which would allow more Chinese investors to invest overseas and help bolster USD strength if the domestic market turns. Over the next few weeks, the State Council is expected to announce that individual Chinese and businesses can directly purchase stocks, bonds and real estate in foreign markets, reports Lingling Wei for the Wall Street Journal.
Lastly, the persistent Greek concerns could continue to weigh on the euro currency, which would help drive the dollar index higher.
“Greece continues to be a constant headache for the euro zone,” Lien said. “But I think that even if they’re not going to pay the bills, they’re not going to kick Greece out of the euro zone as well because the consequences are too severe for the region.”
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.