After slumping 9.1% last year, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the exchange traded fund proxy for the U.S. Dollar Index (DXY), and the dollar itself are not doing much to foster confidence early in 2018.
UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
Earlier this week, the dollar fell “as the Bloomberg Commodity Index reached its highest level in about 11 months. Combined with reports showing strength in Chinese and European manufacturing, there is probably more pain ahead for the dollar as investors anticipate money flowing into other economies, said Mark McCormick at Toronto Dominion Bank,” reports Bloomberg.
Tax reform is expected to help the dollar. As companies repatriate their foreign reserves, the action will typically require selling foreign holdings and buying U.S. dollar-denominated assets, or increase the supply of foreign currencies while raising the demand for U.S. dollar, which would translate to a stronger U.S. dollar against its foreign counterparts. Bank of America Merrill Lynch projects repatriations could total $200 billion and $400 billion.
However, some currency traders are warning that this upcoming move may signal an end to the USD’s almost seven-year-long bull market, pointing to potentially tighter monetary policies out of other developed economies.
“Options are signaling that traders have started to prep for the possibility of greenback losses. The dollar’s one- and six-month risk reversals against the euro, a barometer of positioning and investor sentiment, both rose to the highest in a month in anticipation of a weaker dollar,” according to Bloomberg.
Over the past month, investors have pulled $67.7 million from UUP.
Traders considering a bearish position on the dollar can consider the PowerShares DB US Dollar Index Bearish (NYSEArca: UDN), an inverse though not leveraged bet against the greenback.
For more information on the USD, visit our U.S. dollar category.