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U.S. Dollar Stability Could Help Markets

This article was originally published on ETFTrends.com.

Last year, the Invesco DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) jumped 7.10% to rank as one of the year's best-performing currency exchange traded funds. However, the strong dollar hampered an array of asset classes from commodities to international stocks and more.

Some analysts and market observers believe the dollar is poised to retreat in 2019. Analysts argued that the dollar’s strength at the start of the year was just a brief spike in a broader downward trend that began in 2017, pointing to easing of trade tensions, the ebbing effects of U.S. tax cuts and the Fed’s hesitation to tighten its monetary policy. Dollar stability or outright declines by the greenback could benefit broader markets.

Slowing economic growth in the U.S., the world's largest economy, could prompt modest dollar declines this year.

“A year ago, a late-cycle tax cut induced an atypically strong, at least relative to the post-crisis norm, period of U.S. growth,” said BlackRock in a recent note. “Today that impulse is fading. Purchasing manager surveys peaked early last year and economic releases are no longer beating the consensus. This does not mean that the economy is headed towards recession but simply that growth has peaked, a reality reflected in lower 2019 and 2020 GDP estimates.”

U.S. Dollar Dilemma

If inflation continues cooling, that coupled with slower economic growth could prompt the Federal Reserve to slow its pace of interest rate increases this year, which could weigh on the dollar. Four rate hikes last year were widely seen as the catalyst for the dollar's 2018 rally.

“Along with growth, both inflation and inflation expectations are moderating. Five-year inflation expectations–derived from the TIPS market–peaked in May at over 2%. Today they are a bit above 1.60%. As inflationary pressures moderate and expectations come down, the Federal Reserve has begun to signal a (potentially) more measured pace to future interest rate hikes, removing one of the key tailwinds for the dollar,” according to BlackRock.

Traders who are considering a bearish position on the dollar can capitalize on the further weakness through an inverse USD strategy, the Invesco DB US Dollar Index Bearish (UDN) .

Investors have pulled $127.09 million from UUP to start 2019.

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