Impacts of Stronger Greenback if Dollar Rallies

Up about 4% year-to-date, the Invesco DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is one of this year’s best-performing major currency ETFs. However, some market observers remain concerned about the impact of a stronger greenback.

UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index – Excess Return Index.

“A stronger U.S. economy relative to international economies has contributed to the dollar rally, while trade tariff rhetoric has pushed investors to seek out the currency as a safe haven asset,” said Michael Binger, senior portfolio manager at Gradient Investments, in an interview with CNBC.

Dollar Benefiting From Fed

The dollar is benefiting from, among other factors, interest rate tightening by the Federal Reserve. The Fed has boosted borrowing costs twice this year with plans for two more rate hikes before the end of 2018.

Rising inflation in the U.S. could be a catalyst for additional rate hikes, which could spark the dollar higher. However, some market observers believe other global central banks are out of ammunition for easy monetary policy, meaning dollar rivals, such as the euro and yen, could be due for some upside as well.

Related – Gold ETFs: Waiting on Dollar Declines