Currency ETFs Rise as Dollar Hits 10-Month High

Stocks and bonds aren’t the only assets being impacted by the recent realization that the Fed might keep rates “higher for longer.” Higher rate expectations have been pushing the U.S. dollar up in recent sessions as well. 

The U.S. Dollar Index topped 106 on Monday putting it at its loftiest level in ten months. ETFs that track the greenback, like the $505 million Invesco DB U.S. Dollar Index Bullish Fund (UUP) and the $253 million WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), have been tagging along to the upside. 

On a year-to-date basis, UUP is up 6.7%, while USDU is up 5.7%.  

Both funds are still below their 2022 highs. Last year, the Dollar Index traded as high as 114—its richest level since 2002.  

In addition to aggressive rate hikes by the Fed—which make the dollar more attractive compared to currencies from countries where rates are lower—safe haven demand also propped up the buck.  

Stock markets were plunging and recession fears were intense in 2022. This year, we’re not seeing that same bearish intensity and that’s probably why the U.S. Dollar Index is still around 7% off last year’s highs, even though interest rates today are even higher than they were back then.  

Currency ETFs Depend on the Dollar 

Of course, that could change. If stocks start sinking again and economic jitters reemerge, that could spark more aggressive flows into the dollar. In particular, shocks that emanate from outside the U.S. tend to be good for the dollar. 

On the other hand, anything that weakens the higher-for-longer narrative could squash the dollar’s rally, including weakness in the U.S. economy that causes investors to anticipate Fed rate cuts. A rebound in economic growth overseas that makes assets denominated in other currencies more attractive could also dent the greenback’s rally, including ETFs that track them.