Trump Talks Down U.S. Dollar: What Lies Ahead For ETFs?

The U.S. dollar has been in the spotlight since before the presidential election. Initially what Donald Trump delivered in speeches was mostly “inward looking”. Many research organizations then believed that Trump’s policies may hinder U.S. growth and thus may cause an upheaval in the dollar.

An ABN Amro analyst then saw prospects of inflation outdoing growth, negative real interest rates and a “longer-term downtrend for the U.S. dollar.” Moreover, Trump is a 'low interest rate person’. Concerned about the U.S. economy’s $19 trillion of debt, Trump wants to keep interest rate low ahead so that the country does not have to end up with a much higher interest payment.

If this was not enough, Trump was expected to push for currency wars against the key trading partners of the U.S., as per the source. Agreed, his mode of war was supposed to be via tariffs, but a lower greenback route wasn’t completely brushed off.

What Happened to Dollar Post Election?

In reality, speculation over fiscal stimulus to be introduced by President Trump, low taxes, an easier regulatory environment and more domestic job creation were expected to boost growth and stoke inflation in the U.S.

Rising oil prices in the wake of an OPEC output cut deal in late 2016 also played a role in pushing up inflationary expectation. Added to this, was an improving U.S. economy and the resultant possibilities of faster hike in rates by the Fed. All these took the greenback to a 13-year high post election in November (read: Currency ETF Winners & Losers Post Trump Win).

Trump Again Talks About Dollar Overvaluation

On April 12, Trump again tried to get the greenback off its high horse. He indicated that the U.S. dollar “is getting too strong” and wishes that the Federal Reserve keeps interest rates low. The President also kept the possibility of re-nominating Fed Chairwoman Janet Yellen and supported her low interest rate policy, as per Wall Street Journal.

The President’s main concern is that in a rising dollar environment, the profitability of U.S. businesses having considerable foreign exposure will be hurt. This is especially true given that Japan and the Euro zone are still practicing an ultra-easy monetary policy which in turn is making American goods pricier than European or Japanese products (read:China Yuan ETFs in Focus on Trump-Xi Summit).

How Did Dollar ETFs React to All This Rhetoric?

Trump’s latest statement undermined the dollar strength. U.S. dollar ETFPowerShares DB US Dollar Bullish ETF (NYSE:UUP) UUP lost 0.5% about April 12. On a year-to-date basis (as of April 12, 2017), the fund is off about 2.2%. However, in the last six months (as of April 12, 2017), the fund was up 2.6%.

Another fund WisdomTree Bloomberg US Dollar Bullish ETF USDU was up about 1.8% in the last six months (as of April 12, 2017). The product is down 3.2% so far this year (as of April 12, 2017) and shed about 0.4% on April 12, 2017.

How Will Dollar ETFs Behave?

The dollar’s ride in the near term may be somewhat frail because of a host of factors. Apart from Trump’s fascination for low rate policies, considerable volatility is popping up in the market at the current level.

Geopolitical tensions due to the U.S. military strike on a Syrian airbase and the U.S. move against North Korea’s missile launches as well as overvaluation concerns in the stock market may push investors toward safe-haven trade like treasuries. This in turn will likely drag down bond yields and hurt the greenback (read: 4 Hedge Fund ETFs to Counter Geopolitics & Fed Fears).

Notably, yield on the 10-year U.S. Treasury note dropped 10 bps to 2.28% on April 12, from this month’s high of 2.38% on April 7. Short-term bond yields have been restricted lately. Yield on two-year bonds declined to 1.24% on April 12 from this month’s high of 1.29% on April 7.

Plus, the Fed has also hinted at deleveraging the balance sheet this year. If this happens, chances of faster rate hike this year will be slim as two tightening moves will not be likely at a time.

If this is not enough, lack of detailing and progress on fiscal reflation may cut some strength of the greenback in the near term. Some analysts have now started questioning the certainty of Trump’s plans which once initiated the dollar’s raging rally.

Last but not the least, Minneapolis Fed President Neel Kashkari, who is a voting member of the Fed monetary policy formulating committee, recently talked about a “slack in the labor market” and saw “more room for inflation to head up” (read: 4 Sector ETFs Defying 10-Month Low Job Gains in March).

Bottom Line

Having said all, we would like to suggest investors to remain on the sidelines and look for better entry points to the dollar ETF. UUP has a Zacks ETF Rank #3 (Hold).

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