Surging US Dollar Impacting ETFs

June 04, 2019

Economic worries are causing U.S. interest rates to tumble, but that hasn’t hurt the U.S. dollar. The greenback is still one of the strongest currencies around, and has been trading at close to the highest levels in two years.

Year to date, the $380 million Invesco DB U.S. Dollar Index Bullish Fund (UUP), which tracks U.S. Dollar Index futures, is up 3.4%, adding to last year’s 7.1% gains.


US Dollar Index


Rates Plunging Faster Elsewhere

There are a few reasons the buck may be holding up despite plunging U.S. interest rates. For one, even after their decline, U.S. interest rates are well above the rates seen in other developed countries. The German 10-year bond yield, for example, hit a record-low of -0.2% last week (yes, negative 0.2%), falling below the previous lows set in 2016.

In Japan, the equivalent 10-year yield is at -0.1%, and in the U.K., where rates are actually positive, the 10-year is still only yielding 0.89%.

Compare that to the U.S., where the 10-year Treasury is yielding 2.12%. Sure, it’s the lowest yield in 21 months, and certainly, it could head even lower if the Fed cuts interest rates a few times this year, as some traders expect. That doesn’t change the fact that U.S. rates and the U.S. economy (as uncertain as its outlook currently is) are still superior to the alternatives out there.

Straightforward Impact

For ETF investors, the dollar’s strength has repercussions, both direct and indirect. The most straightforward impact is on currency ETFs like the aforementioned UUP, or the Invesco CurrencyShares Euro Trust (FXE), the Invesco CurrencyShares Japanese Yen Trust (FXY) or the WisdomTree Chinese Yuan Strategy Fund (CYB).

ETFs with long exposure to the dollar have been doing well, while ETFs with long exposure to rival currencies have been performing poorly. Currency ETFs are good tools for investors to bet on that trend continuing or reversing.

Exporters Affected

Even for investors who aren’t interested in speculating directly on foreign exchange rates, currencies still have an impact. That doesn’t necessarily mean investors have to make dramatic moves to their portfolios in response to fluctuations in currencies, but they should understand how such movements may affect their returns.

For instance, a stronger dollar makes U.S. exporters less competitive and reduces the profits of multinational companies that conduct much business overseas.

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