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Recent Weakness in Dollar ETFs Only a Minor Setback


The U.S. dollar is depreciating against foreign currencies on Federal Reserve rate expectations, but the USD and currency-related exchange traded funds still remain a long-term play.

Over the past month, 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, has declined 5.0%. Additionally, the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) , which tracks the USD against a broader basket of developed and emerging market currencies, has dipped 3.5%. [Dollar ETFs Experience Worst Run in Almost Two Years]

The Dollar Index is now trading at around 93.7 after tracking above 100 early March, according to Bloomberg data.

However, fund managers still believe the U.S. dollar has more room to run, especially against the euro currency, reports Jenny Cosgrave for CNBC.

Many are pointing to the diverging monetary policies between the U.S. Federal Reserve and overseas central banks. For instance, the European Central Bank is just starting its quantitative easing program. Meanwhile, the Fed is cogitating on tightening its monetary policy down the line, which should diminish the supply of money sloshing around the economy and strengthen the USD.

Additionally, currencies tend to strengthen or weaken in long cycles, and we are just at the beginning of a strengthening cycle. Historically, the dollar moves over three- to four-year cycles, appreciating 20% to 30%. The dollar has gained 15% against a number of foreign currencies, so there is more room to run, according to PIMCO’s chief investment officer of real return and asset allocation, Mihir Worah.

“We think there is another 5 to 10 percent appreciation left in the dollar,” Worah said in the article. “Clearly if the dollar moves too fast, it impacts what the Federal Reserve does, but to put numbers on it – we see parity versus euro and 125 versus the yen. So another 5 or 7 percent from here wouldn’t change what the Fed is likely to do from here.”

Head of U.S. equities and fund manager at Artemis, Cormac Weldon, even projects a 20% jump in the USD ahead as the “dollar shock” continues on an interest rate hike later in the year.

“I think it depends how far and how fast interest rates go up,” Weldon said. “We think a (U.S.) rate rise will be relatively gentle but by the end of next year perhaps they could be over 100 basis points. So yes, we do believe it is more likely to have further dollar strength.”

Meanwhile, currency traders who are looking to profit off weakness in the EUR can utilize inverse euro-currency ETF options. For example, the ProShares Short Euro (EUFX) provides 100% of the inverse or opposite return on the U.S. dollar price of the euro. The ProShares UltraShort Euro (EUO) provides 200% of the inverse return of the U.S. dollar price of the euro. Lastly, the Market Vectors Double Short Euro ETN (DRR) also provides a -200% exposure to the euro.

For more information on the forex market, visit our currency ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.