The U.S. dollar and exchange traded products such as 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, remain in precarious positions.
While the greenback has gotten a post-Brexit lift, the Federal Reserve’s impact on the greenback looms large. On Wednesday, Federal Open Market Committee (FOMC) meeting minutes revealed the Fed is concerned about the U.S. labor market. That is prompting some traders to think an interest rate hike this year is nearly out of the question, a sentiment that is dollar negative.
Related: Are Dollar ETFs Ready to Rally?
The U.S. dollar has previously rallied on expectations for a tighter U.S. monetary policy, which would diminish the amount of dollars sloshing around the economy and prop up the greenback against foreign currencies. However, with Fed backtracking on its interest rate outlook, the dollar is losing some of its previous momentum.
Brexit, while dollar positive, is the latest in a string of concerning global macro trends that have many investors preparing for slower global economic growth. Obviously, the Fed is aware of such trends and if the central bank is preparing for slack growth, it is unlikely it would hike rates.
[related_stories]Still, there are alternative points of view. Some market observers believe the Fed can hike rates and that the dollar can continue moving higher.
“Deutsche Bank AG, the world’s No. 4 currency trader, says the prospects for gains in the dollar are increasing as improving financial conditions add to the case for the Federal Reserve to raise interest rates this year,” according to Bloomberg.
Currency ETFs try to reflect the performance of a single currency or a basket of currencies. ETF providers structure their currency funds to try to reflect the movements of a currency in a foreign exchange market by holding foreign currencies directly, foreign currency denominated short-term debt instrument, derivatives or swaps.
Related: Currency Hedged ETFs Offer a Smoother Long-Term Ride
Overseas central banks have implemented low interest rate and even negative interest rate policies, which have helped push down yields across the world – there is almost $8 trillion in global bonds with negative yields.
“Fed Bank of San Francisco President John Williams said Britain’s vote to exit probably won’t derail the U.S. economy and a rate increase is still possible this year,” reports Bloomberg.
For more information on Currency ETFs, visit our Currency-Hedged category.
PowerShares DB U.S. Dollar Index Bullish Fund
