Betting On The Greenback: Dollar Trajectory Remains Strong, These ETFs Could Win Big

The U.S. dollar’s trajectory is strong, although Invesco DB US Dollar Index Bullish Fund UUP has dipped about 0.8% so far this year.

Several indicators suggest that the greenback could remain resilient in the near term, and several ETFs may benefit from this trend:

• WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU: This actively managed ETF provides direct exposure to the U.S. dollar, tracking the Bloomberg Dollar Total Return Index. The ETF tends to have strong negative correlations with international equities and bonds, making it a good hedge against global market instability. The expense ratio is 0.5%.

• iShares Russell 2000 ETF IWM: A stronger dollar tends to favor domestic-focused small-cap companies, as they are less exposed to currency fluctuations from international trade. This ETF, which tracks the Russell 2000 Index and carries an expense ratio of 0.19%, could benefit from this trend.

• iShares Currency Hedged MSCI EAFE ETF HEFA: As the dollar strengthens, investors may look to currency-hedged international funds. HEFA offers exposure to developed markets in Europe, Australasia, and the Far East while mitigating currency risk. The expense ratio it carries is 0.38%.

Market Movers Affecting The Dollar

President Donald Trump's latest round of tariffs has reignited global trade tensions, creating market uncertainty that typically benefits the dollar. On Jan. 30, Trump announced new tariffs, including a 25% levy on Mexico and Canada (though delayed for now) and a 10% duty on all Chinese imports effective Feb. 4.

China retaliated with targeted tariffs on U.S. goods and issued warnings to companies like Alphabet GOOGL about potential sanctions. Canada responded too with a retaliatory tariff on the U.S. The uncertainty stemming from these trade policies is leading investors to seek safe-haven assets, driving demand for the dollar.

Also Read: Trump Confirms Maximum Economic Pressure On Iran, Calls China’s Tariff Retaliation ‘Fine’

In its January meeting, the Federal Reserve held interest rates steady at 4.25%–4.5%, emphasizing a cautious approach given lingering inflation concerns. With no immediate plans for rate cuts and inflationary pressures still a concern due to tariffs acting as a tax on imports, the Fed may keep rates elevated for longer. A less-dovish Fed is generally a positive for the greenback, as higher interest rates make U.S. assets more attractive to foreign investors.

Meanwhile, labor market data suggests the economy remains on stable footing. January's job growth slowed slightly, but at 4.0%, the unemployment rate remains low.

Wage growth remains strong, supporting consumer spending and reinforcing expectations that the Fed will not rush to cut rates before June 2025.

As Jeffrey Roach, chief economist at LPL Financial, put it per a report by Business Standard, “An unemployment rate at 4% is considered very low, giving the Fed reason to keep fed funds unchanged in the near term.”

Short-Term Outlook For The Dollar

State Street Global Advisors expect the U.S. dollar to maintain its strength into Q1 2025, driven by strong growth, rising yields, and its safe-haven appeal amid trade tensions.

However, with long-dollar positions becoming stretched after a strong Q4 rally, a modest pullback in the next one to two months due to profit-taking is possible.

The slow legislative process may dampen optimism about some of Trump's growth-positive policies, but unless there is a significant economic slowdown, any dip in the dollar is expected to be temporary and shallow.

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