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 surged 5% over the past month and much of that move is attributable to speculation that the Federal Reserve will boost interest rates next month.
Dollar ETFs have been rallying on speculation the Federal Reserve would hike interest rates from the near-zero levels. 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 tighter monetary policy would diminish the supply of U.S. dollars floating around in the economy and help the greenback appreciate against foreign currencies. [Dollar ETFs Could Soar Well After Fed Liftoff]
“Conventional wisdom would say that higher interest rates will provide strength to the US Dollar Index. We’ve heard that echoed since school, in economics, and pretty much all of 2015 on the television,” according to See It Market. “But there’s just one problem with that: It isn’t always true. In fact, looking back over the past twenty years at the past three higher interest rate cycles and you’ll see that the US Dollar Index declined during two of those time periods. Yep, so much for conventional wisdom.”
Meanwhile, the European Central Bank is more likely to expand quantitative easing to bolster growth. Some observers expect the ECB to take further action after the terror attacks, which may weighed on the economic outlook.
“The latest developments after the terror attacks in Paris will strengthen the political support for ECB actions at its meeting on December 3,” Christoph Riniker, head of equity strategy research at Julius Baer, told the Wall Street Journal.
Moreover, the U.S. dollar is seen as a safe-haven currency, which tends to appreciate during times of distress or uncertainty.
PowerShares DB U.S. Dollar Index Bullish Fund
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.