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Are Dollar ETFs Poised for More Losses in 2018?

Sanghamitra Saha
BOJA vs. SBUX: Which Stock Is the Better Value Option?
BOJA vs. SBUX: Which Stock Is the Better Value Option?

The ride has been tough for U.S. dollar since 2017. Thanks to geopolitical tension and uncertainty regarding the passing of President Donald Trump’s proposed policies, the greenback dived last year. Even two rate hikes by the Fed could not put upward pressure on bond yields for the most part of 2017, which undermined the dollar’s strength.

The passing of tax reform failed to boost the currency materially. PowerShares DB US Dollar Bullish Fund UUP) was off about 10% in 2017. That marked the largest annual decline since 2003 when the greenback slumped almost 15%.

While many thought about a recovery in 2018, the U.S. dollar has shown no such signs so far. UUP is down 1.8% in the year-to-date frame and WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU has retreated about 2.5%.

This has made us really think if there are any signs of a rebound in the U.S. dollar.

Inside the U.S. Dollar’s Agony

Trump Favors Weaker Dollar?

One of the reason behind the dollar’s weakness is Trump’sintention to have a weaker currency. U.S. Treasury secretary Mnuchin already indicated that a weaker dollar is a positive for U.S. trade. In any case, the U.S. dollar has been in the spotlight since before the presidential election.

Trump is a “low interest rate person.” Concerned about the U.S. economy’s $19 trillion of debt, he wants to keep the interest rate low ahead so that the country does not have to end up with a huge interest payment.If this is not enough, Trump is expected to push for currency wars. Agreed, his mode of war is likely to be via tariffs, so a lower greenback route wasn’t completely brushed off.  

Most recently Trump tweeted that “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” This single tweet ensures that trade war game via weak currency is still alive and kicking (read: Trade Tensions or Not, Stay Safe with These ETFs).

 No More Relative Strength of the U.S. Currency versus the Global Economy?

Upbeat growth in other countries around the world also made the U.S. dollar relatively less compelling. For example, euro has been on a tear lately on a buoyant Euro zone economy and without any policy tightening. Guggenheim CurrencyShares Euro Trust FXE is up 2.4% so far this year and was up 14.4% in the last one year (as of Apr 16, 2018).

Investors are betting on a likely strengthening in the single currency in 2018 after a great 2017 — “its best year versus the greenback since 2003.” So, many investors are swarming into the euro instead of the U.S. dollar (read: A Tale of Two Currencies and The ETF Impact). 

Goldman Sachs, UBS and Lombard Odier are bullish on euro for this year. French Bank Société Générale expects the dollar to decline “another 10% in 2018, first against the euro then against the yen.”

Heavier U.S. Government Borrowing?

A Wells Fargo strategist noted in March that there is more pain ahead for dollar bulls. The strategist pointed to a more fundamental factor that over the last 50 years the greenback has actually treaded lower. Heavier U.S. government borrowing could be one of the factors behind this. High U.S. debt load (as much as $19 trillion) can have an adverse impact on the value of its currency.

Short Dollar

Investors can benefit out of this situation with PowerShares DB US Dollar Bearish Fund UDN, which is up 2.1%. Over the last one year (as of Apr 16, 2018), the fund gained about 9.8%.

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PWRSH-DB US$ BU (UUP): ETF Research Reports
CRYSHS-EURO TR (FXE): ETF Research Reports
WISDMTR-BB USDB (USDU): ETF Research Reports
PWRSH-DB US$ BE (UDN): ETF Research Reports
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