The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) have steadied after the Federal Reserve declined to raise interest rates last month.
Now, some market observers see the dollar resuming its uptrend, which of course would be good news for the aforementioned ETFs. Unlike UUP, USDU includes emerging market exposure, which may have helped bolster gains as emerging currencies are heading for a 10th weekly drop, the longest losing streak since the 1997 Asian financial crisis. Currency traders are concerned that the eventual Federal Reserve rate hike will trigger increased capital outflows from developing markets.
UUP and the dollar have modestly regained some momentum over the past two weeks, indicating that has market volatility continues to be an issue, the dollar’s safe-haven status could be reaffirmed.
A lack of inflation is also seen as a potential deterrent to the Fed imminently hiking rates. The diminished inflation expectations has bolstered demand for long-term maturities. The spread between two- and 30-year securities dipped for a fourth day after contracting to as little as 208 basis points Monday, the least since April 28, Bloomberg reports.
Long-term Treasuries have strengthened and yields dipped on the continued decline in oil prices helped push down inflationary pressures. Meanwhile, short-term Treasury yields have been anchored as speculators bet on a slow interest rate hike from the Federal Reserve. [Low Inflation Lifts These ETFs]
The lower inflation makes Treasury bonds more attractive to fixed-income investors as the real yield, or adjusted nominal return to compensate for inflation, has become more attractive.
“Data showing a robust labor market stand to bolster the dollar as traders ramp up bets the Fed will lift its benchmark rate this year. Yet the opposite result, where expectations for a 2015 increase fade, may not derail the greenback, Credit Suisse analysts said in a note Wednesday. That’s because signs the world’s biggest economy is cooling may help spur the European Central Bank and the Bank of Japan to keep adding monetary stimulus, undermining the euro and yen,” reports Liz McCormick for Bloomberg.
Still, the Fed boosting interest rates is seen as perhaps the most important catalyst for additional near-term greenback upside.
“Traders see a 43 percent probability of a move by the Fed’s Dec. 15-16 meeting, according to futures data compiled by Bloomberg. The chances are 51 percent by the January meeting and 64 percent by the March gathering, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff,” according to Bloomberg.
PowerShares DB U.S. Dollar Index Bullish Fund
