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, traded higher Tuesday in advance of Wednesday’s Fed meeting.
However, market participants are displaying some mixed emotions about the greenback’s prospects following the Fed meeting, even if the U.S. central bank boosts borrowing costs for the first time in nearly a decade.
UUP’s biggest move could still be yet to come. 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.
At issue is in what direction that move will be.
“A statement suggesting the FOMC will raise rates now and possible pause at the next meeting could be seen as negative for the greenback. Much of the recent weakness in the US Dollar Index can be attributed to profit taking and traders lightening up positions ahead of the Fed meeting. The US Dollar Index also suffered some setbacks due to traders unwinding carry trades borrowed in Euros. Tomorrow’s FOMC meeting will likely determine the near-term direction of the market,” according to OptionsExpress.
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]
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.
“The Dollar Index is hanging around some potentially vulnerable levels on the downside. In addition to the 100 day MA, which currently sits at 96.98, support near the 96.50 level is not that far off of the current market. Failure to hold one or both of these levels can lead to technical selling,” adds OptionsExpress.
PowerShares DB U.S. Dollar Index Bullish Fund
