The U.S. dollar continues to gain strength as the Federal Reserve raises interest rates while adopting a quantitative tightening policy. Historically, the U.S. dollar has usually strengthened during times of rising interest rates, and with the Fed having doubled down in recent remarks regarding its willingness to do whatever it takes to tame soaring inflation, the outlook for the dollar remains bullish for now.
The latest projections show that all of the Fed officials anticipate raising fed funds to a minimum of 3% by the end of the year, with most believing rates will be between 3.25% and 3.5%, reported the Wall Street Journal. The Fed has committed to curbing inflation, even at the cost of an economic recession.
“It’s certainly a possibility,” said Federal Reserve Chairman Jerome Powell at congressional hearings on Wednesday. “We are not trying to provoke and do not think we will need to provoke a recession,” he added, but the Fed does believe that taming inflation is “absolutely essential.”
The benchmark federal funds rate is currently between 1.5% and 1.75%, which means that at least another 1.25% of interest rate increases are to be expected this year at a minimum. All of this is happening alongside the quantitative tightening measures the Fed has taken that began this month, whereby the Fed lets the bonds and securities it has purchased roll off its balance sheets, reducing liquidity in the economy.
The U.S. dollar has strengthened in the last 12 months, with the Bloomberg dollar index up more than 10%, and it could climb another 5% if the financial conditions tighten more in response to the interest rate increases, Steven Englander, strategist at Standard Chartered, told Bloomberg.
The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) seeks to outperform the Bloomberg Dollar Total Return Index. It’s an actively managed fund that seeks to benefit when the U.S. dollar appreciates compared to a basket of global currencies by tracking a long position in the U.S. dollar against developed and emerging market currencies that are highly liquid and engage in high trade flow with the U.S.
USDU is a fund that can be used as a diversifier for portfolios due to the dollar’s strong negative correlation to international equities and bonds.
USDU has an expense ratio of 0.50%.
For more news, information, and strategy, visit the Modern Alpha Channel.
