The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the tracking exchange traded fund for the U.S. Dollar Index, is down more than 8% this year, cementing its status as one of the worst-performing developed market currency ETFs. Add to that, currency traders remain bearish on the greenback.
UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Other currencies, including the Australian dollar, yen and Canadian dollar have recently been gaining momentum against the greenback.
“ANZ’s weekly report, citing information from the US Commodity Futures Trading Commission (CFTC), shows that leveraged funds reduced their net positions in the USD by a further $US2 billion last week,” reports Business Insider. “That marks the ninth straight week of net selling, as the US dollar index fell below 94 on Friday for the first time since April 2016.”
Despite persistent media headlines to the contrary, the currency backdrop has been more nuanced since early 2016. Indeed, the U.S. dollar, as measured by the Bloomberg Dollar Index, traded in negative territory from mid-February through mid-November 2016, not reaching positive territory until after the November US elections.
Euro strength has been problematic this year for UUP as the ETF allocates a significant portion of its weight to measuring the dollar against the common currency. For instance, the CurrencyShares Euro Currency Trust (NYSEArca: FXE), which tracks the euro’s price movements against the dollar, is one of this year’s best-performing developed market currency exchange traded funds. Interestingly, FXE is currently heavily shorted, perhaps indicating traders are betting on a euro retreat.
“US dollar weakness has contributed to the recent strength in the euro. Recent data suggests that the Eurozone economy is starting to turn the corner, while the European Central Bank has indicated that it may consider withdrawing some of its ultra-easy monetary policy at its next meeting in September,” according to Business Insider.
Heading into 2017, many bond market participants were betting the Fed would raise interest rates three times, but some market commentators believe two is the appropriate number of rate hikes this year. The Fed boosted rates in March for the first time this year and the third time in 15 months, but a dovish tone following the March meeting muted the dollar’s reaction. The dollar has struggled following the June rate hike as well.
For more information on the USD, visit our U.S. dollar category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.