Dollar Strength Grows: ETFs to Gain From Greenback Momentum
The dollar has been rising amid growing expectations of further Fed rate hikes as policymakers seek to tackle inflation. With markets increasingly pricing in additional tightening in the coming months, the greenback could remain well supported in the near term, making a bullish stance on the dollar an attractive tactical opportunity.
Inflation remains a major concern for markets. With inflation still above the Fed’s 2% target, expectations for further rate hikes remain elevated. However, oil prices have eased recently after briefly touching the $100-per-barrel mark. While lower energy prices could help ease inflationary pressures, they could also weaken one of the key factors supporting the case for a stronger dollar.
That said, oil prices are not the only factor driving inflation concerns. Significant AI-related spending, war costs stemming from the Iran conflict and other economic pressures could continue to fuel price pressures even if oil prices decline further amid easing geopolitical tensions.
As a result, inflation could remain elevated and continue to shape expectations for Fed policy and the dollar.
According to TradingView, the U.S. Dollar Index (DXY) has gained 0.30% in the latest trading session and 0.60% over the past five days. The index has risen 2.01% over the past month and 3.62% over the past year.
The Dollar Gets a Boost From Rising Rate Bets
Last week, the Fed delivered its first rate hike in more than three years and indicated that another could be on the way. With markets anticipating a more restrictive monetary policy stance from the Fed down the road, the dollar could remain well supported through the remainder of 2026 and into the early months of 2027.
The value of the greenback is closely related to the Fed’s monetary policies, as its value moves inversely with interest rate adjustments by the Fed. Therefore, expectations for a more hawkish Fed stance could provide further support to the dollar.
Hawkish Fed Bets Gain Momentum
According to the CME FedWatch Tool, markets are now pricing in a greater likelihood of a rate hike at the Fed’s December meeting than at its October meeting.
Markets currently see a 53.1% probability of rates being raised to 4.0-4.25% at the October meeting. While this does not point to a high conviction for an October hike, the probability has risen sharply from just 8.8% a month ago, signaling that expectations for further rate increases have strengthened.
In December, markets estimate an 89.1% likelihood of the Fed hiking rates. Per the CME FedWatch tool, the probability of rates being increased to 4-4.25% at the December meeting has surged to 48.3%, compared with only 22.8% a month earlier. There is a 40.7% likelihood of the rate being hiked to 4.25-4.5%, rising significantly from a 3.5% likelihood just a month earlier.
ETFs to Gain From Dollar Strength
Against this backdrop, the dollar could remain well supported through year-end as markets increasingly price in the possibility of additional Fed rate hikes. Still, investors should keep an eye on the Fed’s policy path and broader economic developments when evaluating longer-term dollar exposure and diversification strategies.
Below, we have highlighted ETFs that may benefit from a stronger U.S. dollar and are well-suited for investors with a bullish outlook on the greenback.
Invesco DB US Dollar Index Bullish ETF UUP
Invesco DB US Dollar Index Bullish ETF offers exposure to a basket of currencies relative to the U.S. dollar, increasing in value when the dollar appreciates. UUP has gathered an asset base of $395.9 million and charges an annual fee of 0.70%.
Invesco DB US Dollar Index Bullish ETF has a one-month average trading volume of about 1.49 million and has a Zacks ETF Rank #3 (Hold), with a Medium Risk outlook.
The fund has added 6.23% over the past year and 3.84% year to date. Although UUP remains down 0.14% over the past month, the fund is up 1.55% over the past three months.
WisdomTree Bloomberg U.S. Dollar Bullish ETF USDU
WisdomTree Bloomberg U.S. Dollar Bullish ETF employs an active strategy and has gathered an asset base of $276.3 million, charging an annual fee of 0.50%. USDU has a dividend yield of 3.72%.
The fund has a one-month average trading volume of about 363,000 and a Medium Risk outlook.
WisdomTree Bloomberg U.S. Dollar Bullish ETF has added 4.19% over the past year and 2.21% year to date. Although USDU remains down 0.51% over the past month, the fund is up 0.80% over the past three months.
Boost Your Portfolio with Our Top ETF Insights
Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.
Don’t miss out on this valuable resource. It’s free!
Get it now >>Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
