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Follow Goldman's Call on Dollar with These ETFs

The greenback has been soft this year. The U.S. economic lull in the initial part of the year and no fresh Fed rate hike so far after the liftoff in December 2015 have kept the currency subdued. PowerShares DB US Dollar Bullish ETF UUP, which tracks the Deutsche Bank Long US Dollar Index Futures Index, is off about 3.7% (as of September 13, 2016) (read: Rising ETFs in a Falling Dollar Environment).

However, the fund gained over 0.7% in the last five days (as of September 13, 2016) on rising speculation over a Fed rate hike this year, if not as early as next week. Though many investors are clueless about the greenback’s future progression, Goldman Sachs Group offered a bullish view on the U.S. currency.

Why Goldman Bullish on Dollar

According to the bank, the “market is underestimating path of rate increases.” The U.S. currency is on its way to the highest level since August as increased Treasury yields boosted the currency despite the dimming prospect of a sooner-than-expected rate hike.

Goldman expects the greenback to surge 15% based on expectations of a three-percentage-point rate rise within the Fed tightening cycle through 2019. On the other hand, “derivatives traders are pricing in about 50 basis points of tightening over the same period, as per Bloomberg.”

Goldman further added “given how dovish market pricing is, the hurdle for the dollar to rally is low, while the hurdle for it to fall in any meaningful way is substantial.” The bank suggests investing in the dollar versus the Canadian dollar and the yen.

Inside Rising Rate Prospects

Investors should note that Wall Street suffered its worst day in two months on September 9, following the Fed Bank of Boston President Eric Rosengren’s hawkish comments over policy tightening. The bond market also witnessed an uptick in yields on rising rate concerns.

Fed Governor Lael Brainard soon passed dovish comments on the possibility of a hike in the September Fed meeting. But that could not hold back the uptrend in bond yields.

Notably, the U.S. 10-year Treasury yield rose 34 bps in just four days to 1.73% on September 13, while the yield on the six-month U.S. Treasury yield grew 5 bps to 0.54% during the same timeframe.

Apart from the Fed, global central banks also played their role in the sudden reversal in the U.S. Treasury market. The ECB refrained from giving any more stimulus and in July, Bank of Japan did not broaden the economy’s super easy money policies, disappointing many market watchers’ expectations (read: Dull ECB Meeting No Problem for These Europe ETFs).

Speculation that BoJ could lower the buying of long-dated Japanese government bonds also had a negative impact on the long-term bond segment. Bond investors basically figured out that there is a limitation on the central banks’ easing.

ETFs to Profit Out if Dollar Remains Steady

Investors can definitely play this trend with greenback ETFs like UUP and WisdomTree Bloomberg US Dollar Bullish ETF USDU.

Following Goldman, investors can play withUltraShort Yen ETF YCS. We also believe that with the negative interest policy ongoing in Japan and the Fed preparing for a rate hike, the policy differentials would lower the strength of the yen against the U.S. dollar. The fund offers twice the inverse performance of the U.S. Dollar price of the Yen. The fund was up 2.2% in the last five days (as of September 13, 2016) (read: Inverse Currency ETFs).

Yet another way to play the slump in yen and the possible rise of the greenback is through the Japanese stocks. These are highly vulnerable to the movement of the yen. The impact of yen is especially huge for export-oriented automobile companies. So, WisdomTree Japan Hedged Equity ETF DXJ could be a choice if the dollar remains strong and yen reels under pressure on further policy easing by the BoJ (read: Yen Gain Seems Overdone; Time for Japan ETFs?)

Investors can also play the expected dollar surge by investing in Short Euro ETF EUFX thatgivesinverse exposure to the daily performance of the U.S. dollar price of the euro. The fund was up 0.4% in the last five days (as of September 13, 2016).

Last but not the least, if the U.S. dollar continuously rises, it points to a stronger economy. In such a scenario, small-cap U.S. stocks should benefit as these pint-sized stocks have a more domestic focus. These have less foreign exposure and thus will not suffer from negative currency translation. iShares Enhanced U.S. Small-Cap ETF IESM can be a pick in this segment (read: 3 Small-Cap ETFs to Buy as Dollar Rallies to 3-Week High).

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PWRSH-DB US$ BU (UUP): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
WISDMTR-BB USDB (USDU): ETF Research Reports
PRO-ULS YEN (YCS): ETF Research Reports
PRO-SH EURO (EUFX): ETF Research Reports
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