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Currency ETFs: Dollar Rally Catches Traders Flatfooted, Hurts Stocks


PowerShares DB US Dollar Index Bullish Fund (UUP) is in a three-day rally with investors preferring safe havens on concerns over third-quarter earnings and Europe’s protracted debt crisis.

The currency ETF’s tracking benchmark, the U.S. Dollar Index, is testing the key 80 level, which has provided resistance since mid-September.

Yet from a long-term perspective, the Dollar Index is at an important rising support line. Meanwhile, trader sentiment on the greenback is low with only 32% bullish on the dollar, according to Kimble Charting Solutions.

Also, the spread between dollar commercial hedgers and traders is extremely wide at the moment. Similar spreads took place in 2009 and 2011 before large dollar rallies, Kimble notes.

UUP, the dollar ETF, was rising after the International Monetary Fund cut its global economic growth outlook.

“It seems clear that from a growth perspective the dollar looks better supported than European currencies, and with positioning now close to square in the euro, new impetus is required to extend the dollar decline of the last few months,” said Lloyds Bank strategists in a Dow Jones report.

A stronger dollar has been a headwind for riskier assets like stocks in recent years.

“Most participants know that if the USD is allowed to strengthen in a meaningful way against the major currencies … then based on correlation analysis the equity market longs will have ‘hell to pay,’” says Blake Morrow at The FX Cafe blog.

PowerShares DB US Dollar Index Bullish Fund

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