Making Some Green With Dollar ETFs

Buoyed by the surprising results of the U.S. presidential election last month and the anticipation and realization of an interest hike by the Federal Reserve, the U.S. dollar has been on a tear relative to other major developed market currencies.

It may not sound like much, but in the world of currency exchange-traded funds it is: The PowerShares DB US Dollar Index Bullish UUP is higher by 2 percent over the past week. Nearly 65 ETFs hit 52-week highs on Thursday, a day after the Fed unveiled its first interest rate hike of 2016, and UUP was a member of that group.

What's Up With UUP?

The $857.2 million UUP tracks the dollar's price action against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The diverging paths of developed monetary policies bode well for the dollar. Put another way, the Fed just raised rates and is targeting three more rate hikes next year. It is highly unlikely developed markets such as Japan an the eurozone raise rates.

“One might expect investors to shift their fixed income investments to markets with higher interest rates. Since rates are currently higher in the US than the UK, Japan or Canada, this might be a reason to expect the US dollar to appreciate against those other currencies,” according to S&P Dow Jones Indices.

Another Strategy

Another compelling idea to consider among dollar ETFs is the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU, which is up 2 percent this week and joined UUP in Thursday's 52-week high club.

About half of USDU is long the dollar against the euro and yen, the usual suspects of bullish dollar funds, but the WisdomTree offering is more tactical as highlighted by its short exposure to some emerging markets currencies. For example, pitting the dollar against the Mexican peso to the tune of 10 percent of the portfolio has been a fine idea in the wake of Donald Trump's presidential election victory.

“Interest rate differentials aren’t the only factors affecting forex rates. Macroeconomic policy also matters.  With the elections, it appears that US fiscal policy will ease substantially as spending increases and taxes are cut. The new administration has argued for higher US interest rates and tighter monetary policy – given yesterday’s move by the Fed, that is likely.  The first Reagan administration (1981-85) had tight money, easy fiscal policy and a soaring US dollar,” added S&P Dow Jones Indices.