The U.S. dollar has been one of this year’s most disappointing developed market currencies as highlighted by a decline of nearly 2% for the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP). Unfortunately, some market observers believe the greenback has more downside ahead of it.
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. Other currencies, including the Australian dollar, yen and Canadian dollar have recently been gaining momentum against the greenback.
Heading into 2017, many bond market participants were betting the Fed would raise interest rates three times, but some market commentators believe two is the appropriate number of rate hikes this year. The Fed boosted rates last month for the first time this year and the third time in 15 months, but a dovish tone following the March meeting muted the dollar’s reaction.
“The U.S. Federal Reserve is signaling at least two 25-basis-point rate hikes before the end of this year. Heck, maybe more. Boston Fed President Eric Rosengren said the central bank should raise rates three more times this year. Higher rates mean that Treasuries pay more interest. So you can get more interest on bonds denominated in U.S. dollars than in, say, euros,” according to ETF Daily News.
Amid political volatility, the euro is one currency that could weaken against the dollar.
While the ECB’s efforts to weaken the euro this year have not delivered on par with investors’ expectations, some market observers still believe the currency is heading for more downside. That does not mean the euro does not face more near-term downside, a scenario that could worsen for the common currency if the dollar rises in anticipation of higher interest rates in the U.S.
Domestic political factors, including President Trump’s efforts at tax reform, spending cuts and the debt ceiling, could weigh on the dollar as well.
“Even if Trump changes nothing, he’s still going to bump up against the debt ceiling. It’s set to expire on April 28,” according to ETF Daily News. “Do you remember when there was a battle over the debt ceiling in 2011? The government shut down briefly. It triggered the first U.S. debt downgrade in history. It also helped send gold to $1,900 an ounce. We also narrowly avoided a government shutdown in 2013.”
For more information on the USD, visit our U.S. dollar category.