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, and the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) are up 4.5% and 2.6%, respectively, over the past month as traders continue betting the Federal Reserve will raise interest rates in December.
The good news for dollar bulls is that the beginning of Fed liftoff does not mean the end of the greenback’s upside. Dollar ETFs have been rallying on speculation the Federal Reserve would hike interest rates from the near-zero levels. The tighter monetary policy would diminish the supply of U.S. dollars floating around in the economy and help the greenback appreciate against foreign currencies.
The higher yields on U.S. government debt, compared to German bunds, has attracted more European investment interest. Consequently, as Europeans invest in U.S. dollar-denominated assets, the investors have been selling euros for U.S. dollars.
“JPMorgan Chase & Co. says a rally in the dollar may stretch for another six months if the Federal Reserve raises interest rates as expected in December,” reports Bloomberg. “JPMorgan is among the world’s biggest currency traders, including Deutsche Bank AG and Barclays Plc, that are expecting the dollar to advance as the Fed tightens monetary policy. The currency’s gains will probably peak in the middle of next year, said John Normand, head of foreign exchange, commodities and international rates research in London at JPMorgan.”
USDU measures the dollar against some faltering emerging markets currencies, including the Mexican peso, Chinese yuan and Brazilian real as well as developed market currencies. [Dollar ETFs Bandwagon Picking Up Steam]
Fed Chair Janet Yellen has stated that December would be a “live possibility” for an interest rate hike if the U.S. economy continues to strengthen, and the strong jobs number help support the Fed timeline.
The dollar “swung between gains and losses for the past eight months as turmoil in the Chinese economy and lackluster U.S. indicators caused traders to question the case for higher rates,” according to Bloomberg.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.