The dollar is on track for its strongest weekly performance in two months, buoyed by expectations of a more hawkish Fed stance amid rising inflation concerns linked to higher energy prices. According to Bloomberg, as quoted on Yahoo Finance, inflation reports this week have unsettled Treasury investors and reinforced concerns that inflationary pressures remain persistent.
Traders in the options market are also ramping up bullish bets on the greenback, with long-term sentiment climbing to its strongest level in five weeks and nearing the one-year peak reached in late March.
The greenback has staged a strong rebound after earlier weakness as investors rotated away from traditional safe-haven assets amid improving risk sentiment. According to TradingView, the U.S. Dollar Index (DXY) has gained 0.38% in the latest trading session and 1.01% over the past five days. The index is also up 1.19% over the past month and 1.02% year to date.
Per the abovementioned Yahoo Finance article, money markets have shifted sharply toward pricing in a Fed rate hike this year, reversing expectations from just a month ago that favored policy easing. According to the CME FedWatch tool, markets are increasingly pricing in the possibility of additional Fed tightening.
Markets are anticipating a 17.5% likelihood of interest rates being increased to 3.75-4.0% in its September meeting, significantly up from a 1.2% likelihood just a month earlier. Similarly, the probability of rates reaching that range at the October meeting has surged to 28.9%, compared with only 1.1% a month earlier, per the CME FedWatch tool.
Additionally, higher U.S. interest rates can strengthen the dollar by increasing its yield advantage and boosting demand for FX carry trades, as stated by Valentin Marinov of Credit Agricole, per the abovementioned article. Marinov also stated that rising foreign investment into U.S. fixed-income assets and technology equities could help reinforce the dollar’s upward momentum.
Geopolitical Risks and Soaring Oil Prices Lift the Greenback
Escalating tensions in the Middle East continue to drive investor demand toward safe-haven assets, providing support for the greenback. With a definitive peace agreement between Washington and Tehran still out of reach, geopolitical risks remain elevated. Moreover, expectations that geopolitical uncertainty could persist as a recurring theme throughout 2026 may continue to underpin safe-haven demand for the dollar.
According to the abovementioned Yahoo Finance article, the greenback is gaining additional support from elevated oil prices, reflecting the United States’ position as a major energy exporter.
Thierry Wizman of Macquarie Futures noted that both the greenback and the U.S. economy stand to benefit from elevated oil prices, adding that the dollar could continue strengthening against currencies such as the euro and the pound. Wizman further stated that he remains bullish on the dollar for as long as the conflict persists, per the abovementioned article.
Karen Reichgott Fishman, strategist at Goldman Sachs, shared a similar outlook, stating that prolonged energy-market disruptions could further strengthen the dollar against other developed-market currencies, per the Yahoo Finance article.
ETFs to Consider
Below, we have highlighted ETFs positioned to benefit from a strengthening dollar.
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 $331.7 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 1.89 million and has a Zacks ETF Rank #3 (Hold), with a Medium Risk outlook. The fund gained 0.14% in a single trading session on May 14, while adding about 2.09% over the past three months.
Although UUP remains down 1.62% over the past month, the fund has added around 1.1% over the past week, signaling improving momentum amid renewed dollar strength.
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 $368.9 million, charging an annual fee of 0.51%. USDU has a dividend yield of 3.79%.
WisdomTree Bloomberg U.S. Dollar Bullish ETF has a one-month average trading volume of about 332,000 and a Medium Risk outlook. The fund gained 0.31% in a single trading session on May 14, while adding about 1.37% over the past three months.
While USDU remains down 1.55% over the past month, the fund has added around 1.1% over the past week, signaling momentum in the greenback’s path.
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This article originally published on Zacks Investment Research (zacks.com).
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