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Is it the Right Time to Buy Dollar ETFs?

Sweta Jaiswal, FRM

The greenback is having a strong run on the bourses in comparison to a basket of other currencies. This is clear from the 0.4% gain of the dollar index against major currencies on Nov 5 (read: S&P 500 at Record High: 6 ETF Winners of Last Week). 

Let’s look at the factors that are supporting the greenback momentum, especially against the safe-haven currencies.

What’s Behind the Upside?

Optimism on a Trade Deal

The 15-month-long trade spat between the world’s two largest economies has been a major concern for global investors. However, certain positive developments have raised optimism on a solution to the trade tensions. In this regard, U.S. Commerce Secretary, Wilbur Ross recently announced that American firms will soon be given licenses to sell to Chinese telecom giant Huawei. Per articles by the Financial Times and the Wall Street Journal, the United States and China are planning to roll back some tariffs if a trade deal is signed.

Moreover, per a Reuters’ report, Beijing is pushing Washington to roll back 15% tariffs on around $125 billion worth of Chinese goods that were levied on Sep 1. Moreover, China is eyeing to get 25% tariffs scrapped that were levied on around $250 billion of imports on goods — ranging from machinery and semiconductors to furniture. Notably, the United States is already considering lifting tariffs that were to be levied on Dec 15. Meanwhile, China is expected to take the necessary steps to control fentanyl smuggling and also scrap tariffs on U.S. goods, majorly covering farm products.

Some Strong Economic Data

Impressive U.S. economic data is adding to the strength of U.S. dollar. The Institute for Supply Management (ISM) recently announced fresh figures for its service index for the month of October. The readings surpassed expectations. Per the ISM index, the service sector has been growing for 117 consecutive months. Notably, gauges for sales, new orders and employment showed improvement from September. Moreover, the U.S. economy grew an annualized 1.9% in the third quarter of 2019, surpassing expectations of 1.6%, following a 2% uptick in the previous three-month period.

Furthermore, the robust jobs data report for October has instilled optimism among investors. In October, U.S. employers added 128,000 new jobs, after an upwardly revised 180,000 gains in September. The latest number beat market expectations of 89,000 (read: Sector ETFs to Win After Robust October Jobs Data).

Rising US Treasury Yields

On Nov 5, the benchmark US Treasury yields surged to a six-week high level. Thus, the 10-year notes closed at 1.858%, after rising as high as 1.873%, which was the highest mark since Sep 16. Moreover, steepening of the yield curve by 23 bps was observed between two-year and 10-year notes. This also marked the steepest point reached by the curvesince Jul 25.

ETFs in Focus

As the bullish trend in greenback is expected to continue, at least for the short term, investors seeking to play the U.S. dollar could consider the following ETFs:

PowerShares DB US Dollar Bullish Fund UUP

UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index - Excess Return (DB Long USD Currency Portfolio Index ER) plus the interest income from the fund's holdings of primarily US Treasury securities and money market income less the fund's expenses. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound. The fund has so far managed an asset base of $320.1 million. It charges 79 bps in annual fees and has gained 4.5% year to date. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 ETF Zones to Watch Ahead of Fed Meeting).

WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU

The product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. It has amassed $43.1 million in AUM. Expense ratio is 0.50% and the ETF is up 2.3% year to date.

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