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Currency ETFs in Focus on Strengthening Dollar

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A spike in the U.S. dollar played an important role in dragging the major benchmarks into negative territory on Tuesday. Rising possibilities of a rate hike in the final month of this year led the greenback to move up against major currencies. Moreover, improving U.S. economy also boosted the dollar in recent times. Also, increasing chances of a Hillary Clinton’s win in the Presidential election next month had a positive impact on the dollar.

The ICE U.S. Dollar Index (DXY), which tracks performance of the U.S. dollar against six key currencies, rose 0.7% to 97.651. During the day, the index hit the highest level of 97.731 since July end. Meanwhile, the WSJ Dollar Index, which seeks to follow the performance of the greenback against 16 currencies, jumped 0.8% to 88.28, witnessing its highest settlement in nearly seven months (read: Follow Goldman's Call on Dollar with These ETFs).

Among other currencies, pound and euro declined 1.8% and 0.7% against dollar to $1.2133 and $1.1008, respectively. Though greenback declined 0.1% against Japanese currency, yen, the dollar managed to rise in 10 out of the last 11 sessions against yen.

Rising December Hike Chances Back the Dollar

Charles Evans, Federal Reserve Bank of Chicago President said on Sunday that the U.S. economy has still some scope to improve further. He indicated that a December hike “could be fine.” Evans also indicated that it was a “close call” to keep the rate unchanged in the September policy meeting as three policy makers had voted for a raise. Not only Evans, the Fed Chairwoman also indicated that “the case for an increase had strengthened.” She also added that “most participants do expect that one increase in the federal funds rate will be appropriate this year.” As per CME data, the possibility of a rate hike increased from last week’s 65% to 75% yesterday (read: Fed's No Rate-Hike Decision Boosts These Gold ETFs).

Meanwhile, recently released economic data also raised the chances of a rate hike in the December policy meeting. Among other economic data, readings of ISM Manufacturing Index and ISM Services Index indicated that both manufacturing and services sector expanded at impressive rates last month. While the ISM Manufacturing Index rose 2.1 percentage points to 51.5 last month, the ISM Services Index increased from 51.4% in August to 57.1% in September. Separately, the Consumer Confidence Index hit the highest level since Aug 2007 last month (read: Consumer Confidence Hits 9-Year High: ETF Winners).

Advantage Clinton

Fresh opinion polls show that Hillaryhas an edge over Trump heading into elections next month. An NBC News/Wall Street Journal poll released on Monday showed Hillary with 46% support among likely voters, while Trump garnered 35% vote. Also, the latest WSJ/NBC poll says Clinton now has a 9-point lead over Trump, among likely voters.

Meanwhile, after outperforming Trump in the first presidential debate, most of the viewers who followed the second debate judged that Hillary managed to emerge victorious again. According to CNN, the majority of voters watching the debate thought Hillary won the debate (57% to 34%). This also had a positive impact on the greenback as investors see Clinton’s administration as more predictable than one led by Trump (read: Prepare for a Clinton Presidency with These Stocks & ETFs).

ETFs to Watch

ETFs that seek to track the performance of greenback against major currencies are likely to be on investors’ radar. PowerShares DB US Dollar Bullish ETF (UUP - Free Report) and WisdomTree Bloomberg US Dollar Bullish ETF (USDU - Free Report) are well known names in this domain.  Both managed to gain 0.7% yesterday and returned 2.6% and 2.1% over the past one-month period, respectively (read: 3 Small-Cap ETFs to Buy as Dollar Rallies to 3-Week High).

Meanwhile, ETFs that track the performance of individual currencies against the U.S. dollar will also be in focus in the days ahead. Following the dismal performances of euro and pound against the greenback on Tuesday, CurrencyShares British Pound Sterling ETF (FXB - Free Report) and CurrencyShares Euro ETF (FXE - Free Report) declined 1.9% and 0.7%, respectively. Though CurrencyShares Japanese Yen ETF (FXY - Free Report) rose 0.2% on yen’s gain against the greenback on Tuesday, it lost 1.6% over the past one-month timeframe.

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