2013 was successful for both the U.S. stock markets and the dollar. Generally, most of the time when the dollar surges, U.S. stocks struggle but this was not the case in 2013. Both the dollar and the stocks moved up for most of the year.
This trend is likely to continue in 2014 as investors continue to flock to both equities and the U.S. dollar, given an improving economy and Fed tapering plans. As the Fed will purchase $10 billion less in securities from the market this month, interest rates will rise at a slower pace but will lead to a surge in the dollar.
Why Will the Dollar Rise?
Activity is picking up faster in the U.S. economy, building up momentum for 2014. The labor market is showing clear signs of healing with falling jobless claims, the housing market is on the path to recovery, and oil prices are at moderate levels.
U.S. manufacturing index (PMI) rose to 55 in December from 54.7 in November, indicating the fastest growth in 11 months, while factory activity was at a two and half year high in December.
The recent consumer sentiment survey has also been extremely positive, with the latest reading surpassing expectations and being the strongest year-end reading since 2007. The Consumer Confidence Index, measured by the Conference Board, climbed to 78.1 in December from a revised 72 in November.
Further, the U.S. trade deficit narrowed to a four-year low in November buoyed by the booming U.S. energy market and rising external demand.
This has boosted the dollar and will further lead to appreciation on the belief that the U.S. economy will continue to show strong growth, prompting speculation that the Fed will continue to pare its stimulus throughout the year.
On the political front, the U.S. is now on much stronger footing with the two-year bipartisan budget deal, which eases spending cuts and political dysfunction. This move has cleared the path for a stronger 2014. Moreover, the IMF is expected to raise its 2014 growth outlook for the U.S. given the continued upbeat data and the reduction of economic uncertainty.
Given the strengthening economic fundamentals, the bullish trend in the greenback is expected to continue at least for the short term. Investors seeking to make a play on U.S. dollar could consider any of the following ETFs:
PowerShares DB US Dollar Bullish Fund (UUP)
This fund could be the prime beneficiary of the rising dollar as it offers exposure against a basket of world currencies. These include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.
In terms of holdings, UUP allocates nearly 58% in euros while 25% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $673 million while sees heavy daily volume of more than 1.1 million shares. It charges 80 bps in total fees and expenses.
This dollar ETF added 1% since the start of the New Year and has the potential to move higher heading into the year. This is especially true as UUP currently has a Zacks ETF Rank of 2 or ‘Buy’ rating.
WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU)
This ETF is the newest play in the dollar space and has amassed $32.8 million since its debut last month. Volume is also solid, as it exchanges nearly 112,000 shares a day on average. The fund charges 0.50% in expenses.
The product offers exposure to the U.S. dollar against a basket of 10 developed and emerging market currencies by tracking the Bloomberg Dollar Total Return Index. The fund allocates higher to the euro currency at 31.17%, closely followed by Japanese Yen (19.31%) and Canadian dollars (11.43%).
Other currencies like the Mexican Peso, British Pound, Australian dollar, Swiss franc, South Korean Won, Chinese Yuan and Brazilian Real receive single-digit allocations in the fund’s basket. USDU was up 0.5% in the first few trading sessions of 2014.
A stronger domestic economy, bullish global fundamentals, and increasing consumer confidence may propel the U.S. dollar higher in the coming months. Investors could ride this surge in dollar with less risk by going long in the above two unleveraged products.
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