Rising interest rates are obviously feeding into a stronger US dollar, which is great news for bullish greenback investors. However, it could translate into a nightmare for corporate balance sheets, as a rising dollar could put a large indentation into corporate earnings.
That dollar strength is evident in the ICE U.S. Dollar Index, which is up about 16% for the year. As the U.S. Federal Reserve continues to tighten monetary policy amid rising inflation, it’s bolstered the dollar, which is eating into corporate profits.
“The rapacious rise of the dollar is set to wipe more than $10bn from U.S. corporate earnings in the third quarter, analysts estimate, piling pressure on companies that are already grappling with high prices and a gloomy domestic outlook,” a Financial Times article said.
The dissipation of corporate earnings isn’t relegated to one specific industry. It’s taking a toll on a number of business sectors.
“The dollar’s strength has been eating into U.S. earnings all year, taking its toll on makers of everything from children’s toys to cigarettes,” the article added further. “The trend is becoming increasingly difficult for investors to ignore as concerns grow about its knock-on impact on demand.”
2 Funds to Capitalize on a Rising Dollar
Continued dollar strength can give investors an opportunity to capitalize on more greenback upside through the rest of the year and potentially beyond that. Exchange traded funds (ETFs) allow investors to get exposure to the dollar without having to access the foreign exchange (forex) market and play currency pairs.
One fund to check out is the Invesco DB U.S. Dollar Index Bullish Fund (UUP), which tracks the price movement of the dollar against a basket of currencies, including the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. A similar fund to consider is the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU).
Looking at the performance of the ICE Dollar Index, both funds have been comparable in terms of year-to-date performance. This shows that both funds can provide lockstep performance if investors want to add dollar exposure to their portfolios as a hedge against inflation.
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