After the recent fall off, the U.S. dollar and currency-related exchange traded funds may now offer a more attractive entry point for traders seeking to hedge further swings in the foreign exchange market.
Since its March 13 high, 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 2.7%. Additionally, he 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 2.6%. [USD ETFs Pause Their Upward Ascent]
After touching a 12-year high against the euro currency last month, the USD has depreciated 3.7% against the EUR on speculation that the sudden strength in the greenback was hurting the U.S. economy, Bloomberg reports.
However, according to ING Groep NV, concerns over the negative effects of the dollar and the U.S. economy are overblown.
“The market is now pricing in a very subdued pace of the tightening cycle – we disagree,” Petr Krpata, a foreign-exchange strategist at ING, said in the Bloomberg article. “We just see the latest correction as a perfect opportunity to get into the trade again.”
Specifically, the analysts argue that U.S. export industry is not large enough to drastically affect the economy in light of a strengthening dollar. U.S. exports only make up 14% of the economy, the least among Group of 10 nations, compared to Canada’s 30%, Germany’s 46% and over 80% for the Netherlands and Belgium.
Additionally, ING believes that with the Federal Reserve still planning an interest rate hike while other central banks are engaging in loose monetary policies, buying the dollar is a good play in the currency markets. For instance, the European Central Bank has enacted an aggressive 1 trillion euro bond purchasing program, which has made the euro currency a prime selling target.
Currency traders who are looking to profit off continued 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.
PowerShares DB U.S. Dollar Index Bullish Fund
For more information on the USD, visit our U.S. dollar 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.