The newly revived dollar has exerted pressure on the Asian and European currency markets because of investors renewed bets that there is a good possibility that the U.S. Federal Reserve will increase interest rates at least once before the end of the year and potentially as early as next month near the end of September 2016.
Accordingly, we preview certain currency related ETFs’ that will benefit from such a move.
- UUP, PowerShares DB US Dollar Index Bullish Fund
- USDU, WisdomTree Bloomberg U.S. Dollar Bullish Fund
UUP, is designed for investors who want a cost effective (0.80%) and convenient way to track the value of the U.S. dollar relative to a basket of the six major world currencies – the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
USDU, invests in very short-term, investment grade instruments and has a goal to provide total returns, before expenses, that exceed the performance of the Bloomberg Dollar Total Return Index. It has a management expense ratio of 0.50% and has returned approximately 5% annually since inception.
The progress in the regional currency was significant. Monday morning the dollar was fetching approximately 102 yen after playing with levels around 100 yen prior to Fed’s caucus meeting in Jackson Hole, Wyoming.
The Australian dollar was also affected and was trading at $0.755 against the US dollar on Monday morning, a decline from around $0.77 recorded on Friday. The other currency that was affected is the Singapore dollar which was lower with the U.S. dollar fetching S$1.361 on Monday morning against Friday’s S$1.346. On Monday morning, the US dollar index which determines the performance of the dollar against several other currencies moved to 95.65 USD, an increase from the 94.2 recorded on Friday.
According to analysts, the speech that the Fed’s chair Janet Yellen gave at the caucus on Friday could be the reason behind the newly revived dollar. Previously, forecasters were predicting that December would be the month that Fed would bring on a rate hike in 2016. Yellen’s speech however hinted that this date could be potentially brought closer to September when she pointed out that the case for a rate hike had strengthened in the recent months.
Despite the fact that Yellen’s speech did not highlight all factors that influence the decision by the central bank to increase rates, she said that the Fed believes it is almost meeting its goals of maximum employment and stable prices. According to her description, consumer spending is solid but investments are weaker, and the export market has been adversely affected by the strengthening dollar.
Stanley Fischer, the Fed’s vice chair, further pushed the possible September meeting into action when he mentioned that his Chair’s comments were in line with the Fed’s plan to hike the rates come September. The market has since responded and adjusted prices in the likelihood that the Fed’s open market committee meeting to be held on September 20th to 21st would increase rates when they turn live.