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, have been disappointing investors this year as the Federal Reserve has consistently held off on raising interest rates.
However, some market observers believe the worst of the Fed’s impact is already priced into the greenback and that the U.S. currency’s potential downside from current level is limited. 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.
Related: Are Dollar ETFs Ready to Rally?
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.
“Goldman Sachs Group Inc. is telling clients not to fret about a sharp selloff in the dollar as the Federal Reserve re-examines the path of interest rates. The market is already far more dovish than policy makers, the bank says,” reports Susanne Barton for Bloomberg.
[related_stories]Investors have been keeping an eye on economic data to gauge whether or not the economy is healthy enough for the Fed to hike interest rates this year, which would help strengthen the U.S. dollar. However, weak U.S. growth and productivity data have made investors more skeptical of any hikes this year.
Currency traders turned bearish on the dollar as Federal-funds futures showed a 40% chance the Fed would lift rates this year, down from 50% earlier this week, according to CME Group data.
SEE MORE: Gold ETFs Dull on Fed Rate Bets, Strengthening Dollar
Looking ahead, traders will have to wait for Fed Chair Janet Yellen’s comments later this month at the meeting of global policy makers in Jackson Hole, Wyoming to find any more guidance on the central bank’s outlook. The Fed will release its next policy decision on September 21.
“Yet markets continue to be a step ahead of policy makers, Goldman Sachs analysts Robin Brooks and Michael Cahill wrote Friday, limiting the prospects for a tumble in the dollar. Derivatives traders are fully pricing in just one rate hike over the next three years, overnight index swaps show. The next key policy signal will come when Fed Chair Janet Yellen speaks Aug. 26 in Jackson Hole, Wyoming,” according to Bloomberg.
For more information on Currency ETFs, visit our Currency-Hedged category.
PowerShares DB U.S. Dollar Index Bullish Fund
