Dollar ETF Could Continue Struggling

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Even with a pop in early February, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) is down 2% year-to-date and some currency market analysts and observers believe pressure will remain on the greenback for the remainder of 2018.

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.

“We expect the US dollar to continue to depreciate due to ongoing global economic growth and converging central bank policies,” said Invesco in a recent note. “We have revised our 2018 US Federal Reserve rate hike call from two to three, in line with US bond pricing. While recent inflation strength has raised the possibility of four rate hikes, we believe that is unlikely without significant wage pressures.”

UUP’s slack performance since early 2017 indicates shorting the dollar has been the right way to play the U.S. currency. The dollar slumped last year even as the Federal Reserve raised interest rates three times and the currency is tumbling against this year even amid expectations calling for another round of rate hikes.

“Globally, the growth trend is expected to be stronger relative to the US, meaning non-US central banks should shift away from their accommodative stances, especially the Bank of Japan (BOJ) and the European Central Bank. There may be a demand shift away from US investments as growth outperforms elsewhere. Such a development could also weigh on the US dollar,” according to Invesco.

Year-to-date, investors have pulled $19.62 million from UUP. The euro is among the major currencies expected to rally against the dollar this year.

“The euro is likely to continue appreciating, in our view. We believe we are in the nascent stages of a global inflation regime shift, transitioning from a world of disinflationary risk to one that is more balanced. We believe the resulting policy changes will support a weaker US dollar and continue to view pullbacks in the euro as consolidation within a longer-term trend higher,” according to Invesco.

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.

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