Since the stunning results of the November U.S. presidential election, the dollar has been one of the world’s best-performing currencies. The Federal Reserve has obliged dollar bullishness by raising interest rates in December and stoking speculation that it will boost borrowing costs multiple times this year.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) returned more than 3% last year, making it one of 2016’s best-performing developed markets currency exchange traded funds.
UUP 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. 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.
“Mr. Trump has clashed with Fed Chairwoman Janet Yellen in the past and is critical of the central bank’s low interest rate policy. Whether or not the Fed would yield to the incoming administration’s pressure remains to be seen, but it is very likely the FOMC would remain neutral and not let politics influence policy,” according to Options Express.
The U.S. Dollar Index, the index UUP tracks, is now at critical levels, making UUP a must watch ETF for investors over the near term.
“Following the Dollar’s explosive rally from 2014 to 2015, it settled into a 20-month consolidation. In the case of the Dollar Index (DXY), this relatively tight range stretched from roughly 92.5 to 100.5. In the frenzied post-election action in the financial markets, the DXY was finally able to break out above the top of its range. And after a brief test of the 100.5 breakout area in early December, the DXY traded as high as 103.82. In recent weeks, however, we have seen it pull back to where it is once again presently testing the 100.5 breakout level,” according to ETF Daily News.
Eurozone political volatility, Brexit aftermath and Japan’s overt efforts to weaken the yen indicate the dollar should remain strong against the euro, pound and yen.
“Should the DXY indeed be successful at holding this level, a longer-term, more significant up-leg is certainly in play,” adds ETF Daily News.
For more information on the USD, visit our U.S. dollar category.