The U.S. dollar and related exchange traded funds just experienced back-to-back session gains, reflecting the ongoing strength in the greenback and adding to concerns for some.
ETF traders can gain exposure to an appreciating greenback through targeted ETF strategies. For instance, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: 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. UUP increased 1.4% over the past week and was up 1.5% year-to-date.
Additionally, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) tracks the USD against a broader basket of developed and emerging market currencies, including China, India, South Korea, Switzerland, Australia, Mexico, United Kingdom, Canada, Japan and Europe. USDU advanced 1.4% over the past week and was 0.4% higher year-to-date.
The rebound in the U.S. dollar has run counter to the market’s expectations as many believed the U.S. dollar would depreciate amid an unexpected pickup in European growth and the shift toward a more dovish stance out of the Federal Reserve, the Wall Street Journal reports.
However, growth has slowed down in the rest of the world, making the U.S. stand out among global markets.
Meanwhile, some are groaning about the sudden strength as the rising dollar is becoming an increasingly concerning for U.S. multinationals with a large international footprint since the appreciating greenback makes exports less competitive in foreign markets.
For example, International Business Machines Corp, Procter & Gamble Co. and Johnson & Johnson have all stated that the dollar’s ascent dragged down last quarter’s earnings. Bank of America Merrill Lynch calculated that U.S. companies are on pace for their biggest currency-related hit to sales since 2017.
Furthermore, a stronger dollar would pressure commodity prices, which are denominated in USD and become more expensive for foreign buyers when the greenback rises against their local currencies.
Looking ahead, some observers argue the dollar may have more room to run as some global central banks also adopted the Fed’s wary outlook on monetary policy, which suggests that yields between the U.S. and many other economies could remain for the foreseeable future. Meanwhile, the U.S.’s higher yield and relatively strong economy could continue to support the case for dollar-denominated assets.
“The rest of the world looks quite weak, and we can say that the U.S. economy is still stronger on a relative basis,” Ben Randol, a senior analyst of G-10 foreign-exchange strategy at Bank of America Merrill Lynch, told the WSJ. “In that environment, the dollar is going to strengthen.”
For more information on the foreign exchange markets, visit our currency ETFs category.