It's All About The Benjamins, Baby: Dollar ETFs In Rarefied Air

Just three exchange-traded funds hit 52-week highs Tuesday. Neither the PowerShares DB US Dollar Index Bullish UUP nor the WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU were among that trio.

However, UUP and USDU currently reside an average of about 1 percent below their respective highs. In the actively managed USDU's case, the ETF needs to gain a mere four cents Wednesday to reach an all-time high. Up 4.9 percent and 3.5 percent in just the past month, UUP and USDU offer dreammaker and widowmaker potential heading into year-end for professional traders, as so many have piled into long dollar positions.

Related Link: Things Are Getting Interesting For This Dollar ETF

“This is where the majority of the risk lies in the professional community at the moment. With 45 days left in 2015, the US dollar is the strategy that will determine whether dreams will come true or hearts will be broken, and not the developed equity markets,” said Rareview Macro founder Neil Azous in a note out Tuesday.

A Closer Look At USDU

Faltering emerging markets' currencies, a prominent currency market theme this year, are important when discussing USDU, because unlike the U.S. Dollar Index, the WisdomTree ETF features short exposure to several major developing world currencies. Mexico, South Korea, China and Brazil all combine for nearly 19 percent of USDU's weight. Throw in an almost 6.4 percent weight to Australia, a country where the currency has been plagued by the erosion of developing world commodities demand, and USDU's emerging markets exposure grows.

A Closer Look At UUP

UUP is the U.S. Dollar Index tracking ETF, meaning those that are long this ETF like seeing the euro and yen fall, because the $1 billion UUP allocates over its 71 percent of its weight to the dollar against those currencies.

Some ETF traders have not followed their forex peers into the long dollar trade. Over the past 90 days, UUP has bled more than $259 million in assets, while its bearish counterpart, the PowerShares DB US Dollar Index Bearish Fund (Powershares Db Us $Index UDN), has added $4.2 million in new assets, according to PowerShares data.

Bank Of America Survey And The Fed

As Azous noted, the Bank of America Merrill Lynch fund managers survey called the long dollar trade the most vulnerable trade heading in the Federal Reserve's December meeting. However, the same survey also showed 81 percent of participants expect the Fed to hike rates next month, up from 47 percent in October.

Put simply, it is all about the Fed for UUP and USDU. The ETFs' July through mid-October declines were born of the belief that the Fed would not boost borrowing costs this year. The current rallies for the dollar ETFs are the result of the opposite view on interest rates.