As has been widely documented, the dollar is a dud among major developed market currencies this year. Just look at the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), which is down 7.6% year-to-date.
UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The U.S. dollar is strengthening on a number of factors. For instance, the U.S. index of business conditions rose to a three-year high, adding to the improving U.S. economic outlook.
Investors betting on a dollar rebound in 2018 may want to temper those expectations.
“The US dollar has strengthened in recent months on expectations of a December rate hike by the Federal Reserve (Fed). We do not expect strengthening to be the longer-term trend, however. Strong global growth, resulting in less accommodative global central bank policies against a backdrop of gradual Fed policy normalization, is likely to drive the US dollar weaker over the longer term,” according to recent research from Invesco.
The rising euro has also been a problem for the dollar, but some market observers believe the common currency is set to pullback. However, other market participants believe the common currency can continue surging against the greenback.
“We maintain our forecast for further euro appreciation. Global growth momentum remains positive while inflation is subdued — this will likely continue to support the weak US dollar trend and higher euro valuations,” said Invesco. “We continue to view pullbacks in the euro as consolidation within a secular trend that’s generally moving higher.”
Obviously, UUP’s slack year-to-date showing indicates shorting the dollar has been the right way to play the U.S. currency. It may also imply that shorting the dollar has been easy. Moreover, the dollar’s 2017 struggles could be a sign that shorting the greenback is a trade with too many participants.
The yen is one currency the dollar could appreciate against as the Fed raises rates while the Bank of Japan continues its accomodative monetary policies.
“There appears to be a general market view that US and Japanese central bank monetary policies will continue to diverge and that this will push the USD/JPY exchange rate higher,” notes Invesco. “While a weaker yen would likely raise Japanese inflation closer to the Bank of Japan’s 2% target, it could negatively impact consumption in the process, which would not be welcome.”
For more information on the USD, visit our U.S. dollar category.