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, rose nearly 1% last week and with speculation running high that the Federal Reserve will raise interest rates in June, currency markets may be pricing in upside for the greenback.
The dollar and UUP have been weakening this year after the Federal Reserve signaled it would take a gradual approach toward interest rate normalization, dashing bets that a tighter monetary policy would support the greenback.
Related: Are Dollar ETFs Ready to Rally?
The U.S. dollar has previously rallied on expectations for a tighter U.S. monetary policy, which would diminish the amount of dollars sloshing around the economy and prop up the greenback against foreign currencies. That theme could be renewed as June appears to be the right time for the Fed to finally boost rates again.
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However, the dollar could strengthen as analysts attribute the seasonal effect to selling in stocks and commodities that typically occur in May. The sell-off would drive demand for safe-haven assets, like the U.S. dollar.
“We view the U.S. Dollar Index and UUP as tracing an impulsive, five-wave move up from the 2011 low. To keep that scenario alive, we really would not want to see price go much lower than it has done in recent weeks. Ideally it would build on the upward move of the past two weeks without looking back. The first near-term target in the bullish view would be the upper boundary of the channel, but that resistance should break eventually,” according to See It Market.
Traders that are bold enough to remain bearish on the buck can consider the PowerShares DB US Dollar Index Bearish Fund (UDN) , which takes the inverse or short performance of the U.S. dollar against the same basket of six major currencies as UUP, is another obvious beneficiary of the dollar’s swoon.
If another dollar rally is legitimized, it could see the currency soar for an extended period.
“If the impulsive scenario keeps working, then targets for later in 2016 or 2017 should include the area near 26.90 and possibly the area near 27.70. Beyond that point, we would expect another lengthy period of consolidation before we will know whether the Dollar’s upward trend can continue into the next decade,” adds See It Market.
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PowerShares DB U.S. Dollar Index Bullish Fund