Exchange traded fund investors thinking about international exposure may capture improved growth abroad if the strength in the U.S. dollar slows down.
John Bilton, global head of multi asset strategy at JPMorgan Asset Management, argues on the Financial Times that the dollar strength will not become excessive, which will help reinforce the US expansion and give space for global growth to stabilize or accelerate.
In 2015, currency ETF investors may have noticed that the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) slowed down, with UUP up 6.6% and USDU up 7.3% over the past year, after the 2014 through early 2015 surge.
UUP 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. USDU tracks the USD against a broader basket of developed and emerging market currencies.
If the U.S. dollar is starting to peter out, “risk assets accelerate, potentially leading to an eventual change in leadership from developed to emerging market assets,” Bilton said.
Nevertheless, during the early stages of the Federal Reserve tightening cycle, JPMorgan projects the initial rate hikes will support the U.S. dollar – the market is currently pricing two hikes in 2016 and 2017. The strategist also argues that the coming rate rise cycle will likely be shallower and longer than before, which may provide small supports for the greenback.