The Value of the Dollar May Easily Rise

by | Nov 23, 2022

By Jay Morgan

The dollar has been in virtually continual fall since the year 2017 began.

In spite of a 2% increase, the PowerShares DB U.S. Dollar Bullish ETF (NYSE: UUP) has actually lost more than 12% of its value from its 2017 highs.

The exchange-traded fund UUP compares the value of the dollar to six other currencies. The cost of UUP increases when the dollar gains strength in comparison to other currencies.

In general, investors deposit their money in the dollar as a safe haven during uncertain market conditions. Additionally, as the market rose steadily for 15 months, there was less of a demand for secure assets like the dollar.

That, however, has a limited shelf life. Because of increased employment and income, there is currently a worry of inflation in the markets.

Inflation typically follows a healthy economy. That's because people spend more money as their income increases. Additionally, when more money is spent and circulated, the value of each dollar decreases due to the surplus supply.

However, given that the economy hasn't been this robust since before the financial catastrophe, inflation worries are probably overdone.

When inflation rises too much, production costs rise and commercial activity slows. However, inflation is now holding constant at roughly 2%.

Even though it was only about 0% for all of 2015 and some of 2016, that may seem excessive, but in the grand scheme of things, it's typical. In fact, it's seen as beneficial.

As a point of comparison, inflation reached over 4% in 2005 and 2006, just as the economy started to slow down.

How to make money off of this analysis is a common question.

Price of the Dollar

From here, the dollar may also easily strengthen.

Right now, interest rates are quite low throughout a significant portion of the global economy. For instance, the unemployment rate in most of Europe is less than 1%, and there are no immediate plans to raise rates further.

However, the rate in the United States is 1.5%. This isn't excessive, but if the economy remains strong, we might easily see it increase to over 2% this year.

The rate on government bonds, which is currently 2.86%, would also rise as a result. As the interest rate rises, foreign investors will start purchasing more U.S. bonds, which boosts demand for the dollar and improves its value.

How to Get Rich

Although UUP is the only means to directly invest in the strength of the dollar, there are other options with more potential for profit.

One option is to purchase call options on the UUP fund, but this is significantly riskier because you could lose all of your money.

Purchasing a leveraged ETF against a different currency is an additional option.

For instance, the VelocityShares Daily 4X Long USD vs. EUR ETF (NYSE: DEUR) yields four times the rate at which the value of the dollar relative to the euro increases.

The return of the dollar relative to other currencies is also produced by funds of a similar nature, including the pound (NYSE: DGBP), the yen (NYSE: DJPY), and the Australian dollar (NYSE: DAUD).