The PowerShares DB U.S. Dollar Index Bullish Fund (UUP) , which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is creeping higher thanks to rising expectations that the Federal Reserve will boost interest rates in June.
The dollar and UUP have been weakening this year after the Federal Reserve signaled it would take a gradual approach toward interest rate normalization, dashing bets that a tighter monetary policy would support the greenback.
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The U.S. dollar has previously rallied on expectations for a tighter U.S. monetary policy, which would diminish the amount of dollars sloshing around the economy and prop up the greenback against foreign currencies. However, with Fed backtracking on its interest rate outlook, the dollar is losing some of its previous momentum.
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Obviously, the Fed disappointed on the rate hike front and expectations are the central bank will not boost rates at its April meeting. Most bond market traders expect just two rate hikes this year, down from forecasts of four when the year started.
However, the dollar could strengthen as analysts attribute the seasonal effect to selling in stocks and commodities that typically occur in May. The sell-off would drive demand for safe-haven assets, like the U.S. dollar.
A rising dollar also makes already hot U.S. government debt more attractive to investors, particularly those outside the U.S.
“In addition, the perception that the dollar will rise could make it even more attractive for foreign investors to own U.S. bonds, as the currency would be another source of investment returns in such an environment,” according to CNBC.
More international investors have piled in to the relatively attractive yields in U.S. government debt as foreign central bank policies have pushed international government yields to near zero or negative in some cases like Japan.
“Stifel Nicolaus portfolio manager Chad Morganlander believes that now is the time to buy long-dated U.S. Treasury bonds, especially in light of rising yields and global demand. Bond prices dove last week after the Fed’s release of its April meeting minutes, driving up yields for their largest weekly gain since November. Prices and yields move inversely,” adds CNBC.
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PowerShares DB U.S. Dollar Index Bullish Fund