The U.S. dollar and currency-related exchange traded funds have bounced back to their highest levels since spring as traders bet on diverging central bank policies ahead.
Over the past three months, 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 increased 4.0%. 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, gained 2.5%. UUP is now trading around its highest level since April while USDU rose to an all-time high.
Meanwhile, the U.S. Dollar Index, which tracks the greenback against a basket of major currencies, was hovering around 100.25, near its highest level since March 13.
Supporting the recent gains in the USD, the market has a diverging outlook for interest rates in the U.S. and the Eurozone. [Central Banks Command Currency ETFs]
Specifically, currency traders anticipate the European Central Bank will extend its bond-purchasing program at a Thursday, December 3 meeting to prop up sluggish inflation.
On the other hand, the Federal Reserve is expected to begin hiking rates in December for the first time in almost a decade – the Federal Open Market Committee will make an announcement on December 16. Additionally, traders are waiting for hints from Fed Chair Janet Yellen at a scheduled address on Dec. 2 and an appearance before a congressional committee on Dec. 3, a day before the November jobs data.
“We are probably with the consensus, the Fed is going to tighten, the ECB is going to ease, so the euro will go lower to about 1.05 and then that will be your lot (for the year),” Sanjiv Shah, chief investment officer with Sun Global, told Reuters.
The Eurozone euro currency was down 0.25% Monday to $1.0567, edging toward its lowest to the dollar since March.
However, after the U.S. dollar has appreciated almost 10% against its peers this year, some traders are growing cautious. For instance, Societe Generale SA’s Kit Juckes argues that the dollar is overvalued by some measures, Bloomberg reports.
While Juckes anticipates continued dollar buying into the Fed’s meeting, the analyst warned that there is a big chance of “significant correction” afterwards.
“Having bought the rumor, you sell the fact. That should happen before the end of the year,” Daragh Maher, head of U.S. foreign-exchange strategy at HSBC Holdings Plc, told Bloomberg.
Consequently, currency traders may turn to an inverse dollar ETF to hedge against a potential pullback. The PowerShares DB US Dollar Index Bearish Fund (NYSEArca: UDN) takes the inverse or short performance of the U.S. dollar against the same basket of six major currencies as UUP.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on the greenback, visit our U.S. dollar category.
Max Chen contributed to this article.