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The greenback has regained luster over the last few days, touching the highest level this year on May 1. PowerShares DB US Dollar Index Bullish Fund (UUP - Free Report) is down 1.8% in the year-to-date frame but has gained about 3.5% since Apr 16.
What Drives the Recent Rally?
Better-Positioned U.S. Economy & Fed Rate Hikes
The U.S. economy has been enjoying an edge over other developed regions, which made the U.S. dollar relatively more compelling. The first reading of the U.S. GDP for the first quarter of 2018 advanced at a 2.3% annual rate of growth, above market expectations of 2% (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).
U.S. consumer spending grew in March, while the Fed’s preferred inflation gauge touched the central bank’s 2% goal for the first time in a year. The personal consumption expenditures (PCE) price index marked the biggest increase since February 2017.
Such growth and the inflation data should give the Fed enough confidence to proceed with its policy tightening spree. The Fed has already enacted a hike in March and is expected to enact two more in 2018. However, many market watchers expect four rate hikes this year.
On the other hand, the European Central Bank’s (ECB) latest meeting held on Apr 26, 2018 hinted at moderation in economic growth and the need to keep the policy rate constant. The ECB reaffirmed its intention to go slow when it comes to the possibilities of policy tightening (read: Currency Hedged Euro Zone ETFs to Buy After ECB Meet).
The British economy also marked the weakest growth rate in Q1 of this year since a 0.1% shrinkage seen in the fourth quarter of 2012. The rate of inflation in the U.K. dropped to 2.5% in March 2018 from 2.7% in the prior month, below market expectations of 2.7%. This indicates dovishness in the Bank of England (BoE)’s future policies.
Compelling Valuation?
The dollar ETF lost about 9% in the past one year despite the Trump rally and U.S. economic growth. One of the reasons behind the weakening of dollar was Trump’s intent to have a weaker currency for enjoying trade competitiveness. Now that the U.S. economic and monetary policy backdrop is in favor of the greenback, investors will understandably want to cash in on the low valuation.
Will the Uptrend Continue?
Maybe the recent rally in the U.S. dollar is short-lived. We’ll have to wait for a quarter to see whether the slowdown in other developed economies is momentary or fundamental. This will give us an idea about the long-term course of currencies.
Apart from this, a Wells Fargo strategist noted in March that there is pain ahead for dollar bulls. The strategist pointed to a more fundamental factor that over the last 50 years, the greenback has actually treaded lower.
Also, most recently, Trump tweeted that “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” This tweet ensures that trade war game via weak currency should not be ruled out over the long term (read: Trade Tensions or Not, Stay Safe with These ETFs).
ETFs in Focus
Dollar bulls can play WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) apart from UUP. USDU is down 2.5% this year but up 3.1% since Apr 16. However, investors who are cautious about the long-term prospect of the greenback should focus on PowerShares DB US Dollar Index Bearish Fund (UDN - Free Report) (read: 5 ETFs to Profit From a Dollar Rebound).
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Dollar ETFs Bounce Back: Can the Rally Continue?
The greenback has regained luster over the last few days, touching the highest level this year on May 1. PowerShares DB US Dollar Index Bullish Fund (UUP - Free Report) is down 1.8% in the year-to-date frame but has gained about 3.5% since Apr 16.
What Drives the Recent Rally?
Better-Positioned U.S. Economy & Fed Rate Hikes
The U.S. economy has been enjoying an edge over other developed regions, which made the U.S. dollar relatively more compelling. The first reading of the U.S. GDP for the first quarter of 2018 advanced at a 2.3% annual rate of growth, above market expectations of 2% (read: Q1 GDP Growth Beats Estimates: ETFs to Buy).
U.S. consumer spending grew in March, while the Fed’s preferred inflation gauge touched the central bank’s 2% goal for the first time in a year. The personal consumption expenditures (PCE) price index marked the biggest increase since February 2017.
Such growth and the inflation data should give the Fed enough confidence to proceed with its policy tightening spree. The Fed has already enacted a hike in March and is expected to enact two more in 2018. However, many market watchers expect four rate hikes this year.
On the other hand, the European Central Bank’s (ECB) latest meeting held on Apr 26, 2018 hinted at moderation in economic growth and the need to keep the policy rate constant. The ECB reaffirmed its intention to go slow when it comes to the possibilities of policy tightening (read: Currency Hedged Euro Zone ETFs to Buy After ECB Meet).
The British economy also marked the weakest growth rate in Q1 of this year since a 0.1% shrinkage seen in the fourth quarter of 2012. The rate of inflation in the U.K. dropped to 2.5% in March 2018 from 2.7% in the prior month, below market expectations of 2.7%. This indicates dovishness in the Bank of England (BoE)’s future policies.
Compelling Valuation?
The dollar ETF lost about 9% in the past one year despite the Trump rally and U.S. economic growth. One of the reasons behind the weakening of dollar was Trump’s intent to have a weaker currency for enjoying trade competitiveness. Now that the U.S. economic and monetary policy backdrop is in favor of the greenback, investors will understandably want to cash in on the low valuation.
Will the Uptrend Continue?
Maybe the recent rally in the U.S. dollar is short-lived. We’ll have to wait for a quarter to see whether the slowdown in other developed economies is momentary or fundamental. This will give us an idea about the long-term course of currencies.
Apart from this, a Wells Fargo strategist noted in March that there is pain ahead for dollar bulls. The strategist pointed to a more fundamental factor that over the last 50 years, the greenback has actually treaded lower.
Heavier U.S. government borrowing could be one of the factors behind this. High U.S. debt load (as much as $19 trillion) can have an adverse impact on the value of its currency (read: Are Dollar ETFs Poised for More Losses in 2018?).
Also, most recently, Trump tweeted that “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” This tweet ensures that trade war game via weak currency should not be ruled out over the long term (read: Trade Tensions or Not, Stay Safe with These ETFs).
ETFs in Focus
Dollar bulls can play WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) apart from UUP. USDU is down 2.5% this year but up 3.1% since Apr 16. However, investors who are cautious about the long-term prospect of the greenback should focus on PowerShares DB US Dollar Index Bearish Fund (UDN - Free Report) (read: 5 ETFs to Profit From a Dollar Rebound).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>