Thanks to intensifying speculation that the Federal Reserve is heading toward its first interest rate hike of 2016 next month, 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, is up 2.1% over the past month.
Not surprisingly, other currency ETFs are being crimped by UUP’s resurgence. The dollar and UUP have been weakening this year after the Federal Reserve signaled it would take a gradual approach toward interest rate normalization, dashing bets that a tighter monetary policy would support the greenback.
Related: Are Dollar ETFs Ready to Rally?
“A Bloomberg gauge of the dollar is on track to rise for a seventh straight May, as a parade of Federal Reserve officials including Chair Janet Yellen have hinted at higher U.S. interest rates as soon as their gathering on June 14-15. The yen and Australian dollar have been the biggest casualties among developed market currencies, with the Bank of Japan and Reserve Bank of Australia each having the opportunity to add to stimulus at policy meetings next month,” according to Bloomberg.
The CurrencyShares Australian Dollar Trust (NYSEArca: FXA), which tracks the Aussie against the U.S. dollar, is off nearly 6% over the past month. FXA could be increasingly vulnerable as the monetary policies of the Fed and the Reserve Bank of Australia continue diverging. RBA recently cut Australia’s benchmark interest rates to a record low.
Related: Dollar ETF Dithers
Looking ahead, most economists anticipate a second cut before the end of the year, with the June quarter inflation figure, which comes out in August, providing further guidance on the RBA’s path.
[related_stories]The CurrencyShares Japanese Yen Trust (NYSEArca: FXY), which until recently had been one of the best-performing developed market currency ETFs, is off 2.1% over the past month.
“The yen is set to snap three straight months of gains. The BOJ announces its next policy decision on June 16 after refraining from additional easing at the last meeting in late April, opting to take more time to assess the impact of negative interest rates,” according to Bloomberg.
A rising dollar also makes already hot U.S. government debt more attractive to investors, particularly those outside the U.S.
More international investors have piled in to the relatively attractive yields in U.S. government debt as foreign central bank policies have pushed international government yields to near zero or negative in some cases like Japan.
For more information on Currency ETFs, visit our Currency-Hedged category.
PowerShares DB U.S. Dollar Index Bullish Fund
