Following a Federal Reserve-fueled run-up last year, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is drawing concern from currency traders that the dollar could be primed for a near-term pullback.
However, some currency market observers remain concerned about the state of the euro.
The CurrencyShares Euro Currency Trust (NYSEArca: FXE) was one of 2016’s worst-performing currency exchange traded funds, but has traded slightly higher to start 2017, but those modest gains are not sparking much confidence in the common currency.
The European Central Bank (ECB) has been an issue for investors this year, but the ECB recently noted it will not taper its quantitative easing program, at least not in the near-term. Market observers argued that the ECB could even extend its bond purchasing program to further support inflation. The ECB has already spent over a trillion euros buying government bonds, cut its benchmark rate to zero and adopted a negative deposit rate.
“The 60 strategists, surveyed by Reuters last week, believe interest rates will rise in response to President-elect Donald Trump’s planned tax cuts, lifting the dollar. The U.S. currency is also “expected to strengthen against Britain’s pound and to stay buoyant against a basket of major currencies,” Barron’s reports, citing Reuters.
Euro weakness would benefit the ProShares UltraShort Euro (NYSEArca: EUO). Underscoring the euro’s prominence on the global currency stage and investors’ willingness to bet on weakness for the currency, EUO is one of the largest currency ETFs trading in the U.S. Another idea for euro bears to consider is the VanEck Vectors Double Short Euro ETN (NYSEArca: DRR).
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.
After boosting borrowing costs once last year, the Federal Reserve is expected to raise interest rates multiple times this year. If the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback.
“Reuters’ survey respondents predict that the dollar will sit at 101.5 against a basket of six major currencies at the end of this year. That’s about where it is currently. The greenback has risen more than 40% against the currency index since mid-2011,” according to Barron’s.
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