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The king dollar has regained its strength post Trump’s win in the U.S. presidential election on increased inflationary expectations. The currency has been downbeat this year on not-so-robust U.S. economic growth and low interest rates prevailing in the country (read: Best Performing Currency ETFs of 1H16).
Now, speculation over fiscal stimulus likely to be introduced by president Trump, low taxes, an easier regulatory environment and more domestic job creation took the greenback to a 13-year high in mid-November (read: ETF Winners & Losers as Dollar Hits 13-Year High).
WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) and PowerShares DB US Dollar Index Bullish Fund (UUP - Free Report) have added about 2.5% and 2.3% (as of December 12, 2016) respectively since the presidential election. So far this year (as of December 12, 2016), both funds are up about 1% and over 1.7%, respectively (read: Currency ETF Winners & Losers Post Trump Win).
Can the Recent Rally Continue in 2017?
Fed Hike Bet Baked In: The investment world is now abuzz with questions like if the greenback strong enough to rally further. Though the Fed is highly likely to raise rates in its December 13–14 meeting, this is unlikely to bolster the greenback as the hike bet is mostly priced in at the current valuation.
Commodity Currencies Up: The OPEC and non-OPEC deal over output cut gave a boost to oil prices recently and several industrial metal prices staged an ascent on the prospect of increased manufacturing activities. As a result, several commodity currencies including the Australian, New Zealand and Canadian dollars started trading higher against the greenback. If the trend continues in 2017, the greenback may face troubles.
Higher Inflation a Dampener: An increased inflationary scenario may not prove helpful for the greenback. As per Nomura, “since 2000, when real yields rose along with inflation expectations, the dollar rallied by an average of 1%. Yet when real yields rose with falling inflation expectations, the dollar rallied by over 3%.”
Notably, global consumer inflation is on an uptrend lately. The core PCE price index in the U.S. was 1.7% (in October), inching toward the Fed’s goal of 2%. Domestic consumer prices grew 1.6% year over year in October 2016, up from a 1.5% rise in September and in line with market expectations. This is the highest inflation rate since October 2014 (read: Will 2017 Be a Year of Global Reflation & TIPS ETFs?).
In short, along with several analysts, evenwe believe that if inflation continues to go higher but interest rates fail to keep pace with that the increase, spending power will come down and so will the greenback.
Bottom Line
To keep the U.S. dollar steady, the Fed will have to react more frequently. Note that Goldman Sachs Grouppredicted in September that the greenback will surge 15% based on expectations of a three-percentage-point rate rise within the Fed tightening cycle through 2019 (read: Follow Goldman's Call on Dollar with These ETFs).
Plus, several foreign economies including Japan and the Euro zone are still practicing ultra-easy money polices which should keep their currencies low, giving the greenback an edge over these developed currencies.
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Can Dollar ETFs Stay Strong Going into 2017?
The king dollar has regained its strength post Trump’s win in the U.S. presidential election on increased inflationary expectations. The currency has been downbeat this year on not-so-robust U.S. economic growth and low interest rates prevailing in the country (read: Best Performing Currency ETFs of 1H16).
Now, speculation over fiscal stimulus likely to be introduced by president Trump, low taxes, an easier regulatory environment and more domestic job creation took the greenback to a 13-year high in mid-November (read: ETF Winners & Losers as Dollar Hits 13-Year High).
WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) and PowerShares DB US Dollar Index Bullish Fund (UUP - Free Report) have added about 2.5% and 2.3% (as of December 12, 2016) respectively since the presidential election. So far this year (as of December 12, 2016), both funds are up about 1% and over 1.7%, respectively (read: Currency ETF Winners & Losers Post Trump Win).
Can the Recent Rally Continue in 2017?
Fed Hike Bet Baked In: The investment world is now abuzz with questions like if the greenback strong enough to rally further. Though the Fed is highly likely to raise rates in its December 13–14 meeting, this is unlikely to bolster the greenback as the hike bet is mostly priced in at the current valuation.
Commodity Currencies Up: The OPEC and non-OPEC deal over output cut gave a boost to oil prices recently and several industrial metal prices staged an ascent on the prospect of increased manufacturing activities. As a result, several commodity currencies including the Australian, New Zealand and Canadian dollars started trading higher against the greenback. If the trend continues in 2017, the greenback may face troubles.
Higher Inflation a Dampener: An increased inflationary scenario may not prove helpful for the greenback. As per Nomura, “since 2000, when real yields rose along with inflation expectations, the dollar rallied by an average of 1%. Yet when real yields rose with falling inflation expectations, the dollar rallied by over 3%.”
Notably, global consumer inflation is on an uptrend lately. The core PCE price index in the U.S. was 1.7% (in October), inching toward the Fed’s goal of 2%. Domestic consumer prices grew 1.6% year over year in October 2016, up from a 1.5% rise in September and in line with market expectations. This is the highest inflation rate since October 2014 (read: Will 2017 Be a Year of Global Reflation & TIPS ETFs?).
In short, along with several analysts, evenwe believe that if inflation continues to go higher but interest rates fail to keep pace with that the increase, spending power will come down and so will the greenback.
Bottom Line
To keep the U.S. dollar steady, the Fed will have to react more frequently. Note that Goldman Sachs Grouppredicted in September that the greenback will surge 15% based on expectations of a three-percentage-point rate rise within the Fed tightening cycle through 2019 (read: Follow Goldman's Call on Dollar with These ETFs).
Plus, several foreign economies including Japan and the Euro zone are still practicing ultra-easy money polices which should keep their currencies low, giving the greenback an edge over these developed currencies.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>