As the dollar hit a six-month high in yesterday’s trading, PowerShares Momentum Tracker announced that both the US Dollar Bearish ETF (UDN) and the US Dollar Bullish ETF (UUP) had made significant gains in their momentum rankings
“After suffering a long-term slump, the dollar rose more than 8% this past month in relation to the euro,” said Don Dion, publisher of PowerShares Momentum Tracker. In the latest edition of PowerShares Momentum Tracker, Dion profiles both funds, and comments on the “slew of ETFs launched in the past two years that allow investors exposure to different currencies.”
In 2006, PowerShares launched two alternatives to direct currency futures investment in the U.S. dollar: PowerShares DB US Dollar Index Bearish (UDN) and PowerShares DB US Dollar Index Bullish (UUP). UDN and UUP are designed to give investors exposure to the direction of the dollar, through long (UUP) and short (UDN) futures bets using futures contracts tied to the U.S. Dollar Index. This index measures the dollar against a basket of six other currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
“UDN benefited from the dollar decline earlier this year—rising more than 7% from January 2 to March 19,” Dion noted, “in the last month, however, the dollar—and subsequently UUP—has experienced a sudden comeback.” The recent moves in both UUP and UDN bolstered the funds on Dion’s Currency Momentum Table. UDN shifted from the 17th position on July 9 to the tenth position on August 20, while UUP moved from the 29th to the ninth spot for the same period. On July 15, the U.S. Dollar Index closed at 71.87—the lowest value since April’s record lows—and then suddenly reversed course.
“While many analysts have been calling the bottom for months, the momentum of this reversal is somewhat unexplained by the normal course of economic news,” Dion said. In his recent profile of the funds, Dion cites recent dollar intervention and changes in the U.S. International Reserve Position as factors in the momentum shift.
The U.S. Treasury website recently reported that the Exchange Stabilization Fund sold 10 billion euros and bought dollars, a move that certainly strengthened one currency against the other. “It is difficult to claim that measures like this could sustain a dollar rally,” Dion noted, “the foreign exchange market is the largest in the world, and broad measures by international banks might be curbed by inflation worries abroad.”
So could currency intervention be enough to cause, or sustain, a true rally in the dollar and UUP? “Betting on currency movement is made difficult by the variety of factors that impact relative strength,” Dion said, “UUP could be a good addition to aggressive portfolios for the near term—and a good hedge against international exposure for conservative investors in the months to come.”
Components of U.S. Dollar Index
Japanese Yen: 13.6%
British Pound: 11.9%
Canadian Dollar: 9.1%
Swiss Franc: 3.6%
PowerShares Momentum Tracker is a member of Fidelity Independent Adviser’s family of financial publications. With more than 70,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes four monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Don Dion, publisher of Fidelity Independent Adviser (fidelityadviser.com), is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $750 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.