Betting On A Rising Dollar With ETFs

January 07, 2016

After two years of stellar gains, it's an open question whether the rally in the U.S. dollar will continue in 2016. There are another 250 or so trading sessions to go before the final verdict is in, but if the first few days of January are any indication, it's looking like another good year for the greenback could be in the cards.

So far in 2016, the U.S. Dollar Index is up a little less than 1% after having jumped 12.8% in 2014 and 9.3% in 2015. If the dollar is about to embark on another run this year, perhaps now is the time to go long, especially as other asset classes such as stocks struggle.

U.S. Dollar Index

The Bullish Case For The Dollar

By now, the bullish case for the dollar is pretty well known to most investors, and stems from the divergence in monetary policy between the U.S. Federal Reserve and other central banks. At the same time that the Fed is hiking rates, other central banks are either holding steady or loosening policy.

Two central banks in particular—the European Central Bank and the Bank of Japan—are experimenting with enormous quantitative easing programs, putting pressure on their respective currencies, the euro and the yen.

Yet as well as the dollar has done against those developed-market rivals, it has performed even more phenomenally against emerging market currencies.

Rapidly decelerating growth in emerging economies has prompted capital to flee former investor darlings such as Brazil, Russia and China. In turn, these countries' currencies have been plunging against the dollar.

The dollar gained 49% against the Brazilian real last year; gained 19.4% against the Russian ruble; and gained 4.6% against the Chinese yuan.

Dollar Surges Against Emerging Market Currencies

Indeed, the Chinese government has recently showed a willingness to let the country's currency depreciate significantly in recent weeks, with the yuan-dollar exchange rate touching its lowest level in five years yesterday.

If China continues to slow, more losses could be in store for the yuan, and conversely, more gains for the dollar.

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