The CurrencyShares Euro Currency Trust (NYSEArca: FXE) is 10.6% this year, good for one of the worst performances among exchange trade funds tracking developed market currencies. While a major rebound for FXE and the common currency next is not something many currency market analysts are expecting, investors might do well to temper expectations for significant dollar upside against the euro.
Earlier this month, FXE surged after the European Central Bank (ECB) disappointed by global financial markets by not expanding its quantitative easing program by as much as investors were hoping for. 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 been a solid performer for most of 2015.
However, market participants are displaying some mixed emotions about the greenback’s prospects following the most recent Federal Reserve meeting. 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]
However, even the implication that the Fed’s next rate hike after this week could be several months off could be enough to dampen near-term enthusiasm for the dollar and ETFs like UUP. Conversely, FXE probably will not be punished as much next year as it was this year.
“Amundi SA and Axa Investment Managers say the dollar’s strength will constrain the Federal Reserve’s ability to boost borrowing costs aggressively next year, after it raised rates this week for the first time in almost a decade. Strategists surveyed by Bloomberg forecast gains in the U.S. currency will slow to 3.4 percent against the euro in 2016,” according to Bloomberg.