Another Fed Meeting, Another Chance for Dollar ETFs

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, has been victimized this year by the Federal Reserve’s refusal to raise interest rates.

With the Fed meeting again later this week, the dollar and exchange traded funds like UUP will again be in focus, but the greenback faces obstacles in terms of generating near-term upside.

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.

“The U.S. currency reached its strongest level since July on a report showing above-forecast inflation before next week’s central-bank meeting. The greenback pared its decline this year following the Fed’s rate increase in December. That mirrors the Intercontinental Exchange Inc. U.S. Dollar Index’s average 6 percent drop during the six months after the start of the Fed’s previous three central-bank tightening cycles,” reports Susanne Barton for Bloomberg.

The actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) tracks the dollar against a broader group of developed and emerging market currencies in an attempt to outperform the Bloomberg Dollar Total Return Index. Specifically, the fund’s portfolio is comprised of euro, yen, Canadian dollar, Mexican peso, pound sterling, Australia dollar, franc, South Korean won, Chinese yuan and Brazilian real. The inclusion of emerging market currencies may help USDU outperform the dollar benchmark as emerging assets could underperform in a U.S. rising rate environment.