Stubbornly Strong Dollar Could Remain That Way

After ranking as one of last year's best-performing major currencies, the U.S. dollar was supposed to give back some of those gains in 2019. The Invesco DB US Dollar Index Bullish Fund UUP, the largest exchange traded fund tracking greenback price action, did not get the memo.

What Happened

UUP, which tracks the Deutsche Bank Long USD Currency Portfolio Index, is up 3.58 percent. Underscoring the strength in the dollar this year, the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU is up almost 2.20 percent year to date.

Amid expectations that the Federal Reserve will not raise interest rates this year after doing so four times in 2018, dollar strength is confounding some market observers while others expect the scenario to continue.

“The Dollar Index, a measure of the greenback against some of its most traded developed market peers, closed at 98.2030 on April 25, the highest level since May 2017, as global economic weakness and relatively high U.S. interest rates boosted the relative attractiveness of the currency,” according to S&P Global Market Intelligence.

Why It's Important

The dollar has acted as a safe haven as riskier assets have tumbled amid the U.S.-China trade war, but that safety comes with a cost, particularly for export-heavy sectors.

“While a strong dollar can provide some relief for consumers facing higher prices thanks to tariffs on Chinese goods, it is bad news for U.S. companies that rely on selling goods abroad as they usually have to either accept reduced margins or lower sales, depending on whether they cut prices to counter the currency's strength,” said S&P.

The research firm notes several of the marquee components in the Consumer Staples Select Sector SPDR XLP, the largest consumer staples ETF, “expressed concern about the strengthening U.S. dollar in their latest quarterly earning's calls.”

Perhaps not surprisingly, XLP is lower by almost 1.80 percent over the past week while USDU and UUP are trading higher over that period.

What's Next

There are near-term risks for dollar bears, including the China trade war and efforts by some Eurozone economies to weaken the euro.

“Downside risks to the dollar include a more dovish Federal Reserve, a stronger global economy or an end to the U.S. trade war with China, although the last of those is seen as unlikely in the eyes of many analysts,” said S&P.

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