Earlier this year, the U.S. dollar spent considerable as a laggard among the world’s major currencies.
In the wake of Donald Trump’s shocking victory in the recent U.S. presidential election, the greenback has shaken out of its doldrums in significant fashion.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) rose 0.3% Friday and increased 2.2% over the past week. UUP tracks the price movement of the U.S. dollar against a basket of developed market currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP was one of the exchange traded funds to hit a 52-week high last Friday.
Not surprisingly, the Federal Reserve and the potential for an interest rate hike next month loom large for the dollar and UUP.
Looking at the Fed-funds futures, options traders were pricing in a 70% chance of a rate hike in December, compared to a 50% chance a month ago.
A higher interest rate typically supports the U.S. dollar since the currency becomes more attractive to foreign-seeking investors and diminishes the supply of money sloshing around in the markets.
Importantly, UUP could still offer investors significant upside even after its recent sharp rally.
“The momentum could be very strong going forward. This rally is taking place mainly against the EUR, JPY, SEK and CHF. They account for 79% of the DXY already. Chartwise, these currencies could have substantial downside against the USD. Fundamentally, the USD has a widening yield advantage. As such, we see plenty more upside above 100 for the DXY. In the past 35 years, there have only been 2 major breakouts: the first in 1981, when the DXY went on to rise by 60%, and the second in 2000 when it went on to gain 20%,” according to a Daiwa note posted by Shuli Ren of Barron’s.
Further supporting the U.S. dollar rally, the British pound has plunged to three-decade lows on fears of a so-called hard Brexit after U.K. Prime Minister told the Conservative party conference that Britain would trigger Article 50 – the official legal notification that would begin the exit negotiations with the European Union – “no later than the end of March.”
For more information on the USD, visit our U.S. dollar category.
PowerShares DB U.S. Dollar Index Bullish Fund
