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Dollar’s Gains Could be Limited From Here

This article was originally published on ETFTrends.com.

The Invesco DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) , which tracks the USD’s movements against a basket of major developed currencies, is up 5.6% year-to-date, making it one of the best-performing currency exchange traded funds.

However, some market observers see dollar upside from here as limited. UUP tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. UUP tracks the Deutsche Bank Long USD Currency Portfolio Index – Excess Return Index.

“The dollar index has soared around 8 percent since its February low, but I believe we've seen the top for 2018. A few factors are at play here, including the euro's recent trading pattern and the Federal Reserve's hiking path,” reports CNBC.

Waiting On The Fed

Predictably, the Federal Reserve could have a significant impact on the dollar. Bond market participants widely expect the Fed to raise interest rate at its September meeting and again in December. The Fed has already boosted borrowing costs twice this year.

“Finally, the Federal Reserve has already priced in two more hikes this year and three next year. This brings a proverbial ceiling to how much more hawkish it could become,” according to CNBC. “If global uncertainties clear up, we envision other major central banks will make larger strides down a hawkish path relative to what the Fed could do. This would weaken the dollar in a manner, similar to last May, under the same circumstances.”

Rising inflation in the U.S. could be a catalyst for additional rate hikes, which could spark the dollar higher. However, some market observers believe other global central banks are out of ammunition for easy monetary policy, meaning dollar rivals, such as the euro and yen, could be due for some upside as well.

Traders considering a bearish position on the dollar capitalized on the weakness with the PowerShares DB US Dollar Index Bearish (UDN) , the direct inverse play against UUP.

For more information on the USD, visit our U.S. dollar category.

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