Tuesday’s ETF To Watch: PowerShares US Dollar Bullish Fund (UUP)

by on December 14, 2010 | ETFs Mentioned:

December is shaping out to be a stellar month for domestic equity markets, with the S&P 500 continuing its multi-month uptrend and hitting new highs on Monday. Wall-Street’s hot streak has been fueled by temporarily subdued worries about the debt crisis in Europe as well as the pace of the economic recovery back home. However, fears remain thanks to uncertainty over the extension of the Bush-era tax-cuts as well as further plans for QE by the Federal Reserve. Against this backdrop, investors will look to the U.S. as the Federal Open Market Committee (FOMC) will meet on Tuesday [see also ETF Alternatives To The World’s Largest Mutual Funds].

Today, the FOMC is scheduled to discuss plans on how to continue implementing a conservative, but stimulating, monetary policy. The announcement is scheduled to come out later today at 2:15 PM (ET) with the Fed widely expected to leave interest rates unchanged and maintain a target range of 0.0% to 0.25%. Given the recent tax-cut extensions and initial quantitative easing, investors will be anxious to hear the central bank’s take on recent developments and eager to glean any information on the likely next steps [see also What’s Gotten Into Yen ETFs?].

The Fed meets and makes policy announcements regarding short-term interest rates eight times a year, as well as taking necessary measures to add or subtract liquidity in credit markets, separate from what is related to adjustments in the fed funds rate. Interest rate announcements are usually pivotal news releases that can tip the markets either way. However, it’s important to keep in mind that the general consensus is that the Fed will stay on the same path, meaning that investor’s sentiment regarding the decision tomorrow is already priced in, and a volatile market reaction to any announcement is unexpected. More important in tomorrow’s announcement is collective commentary regarding the outlook on the economy as well as hints about monetary policy decisions going forward. This looks to be especially important in today’s meeting, as Bernanke recently went on the record discussing the possibility of yet another round of QE should a recovery fail to materialize [see also  U.S. Dollar ETFs: No End To Freefall In Sight].

With this major announcement on tap, the PowerShares DB USD Index Bullish Fund (UUP) should be active in Tuesday trading. UUP is a rules-based index composed solely of long USDX futures contracts, which are designed to replicate the performance of being long the US Dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The dollar slipped against its major rivals on Monday, and support from the Fed for another round of bond-buying could extend that decline. “For months, expectations that the Fed would embark on a new round of Treasury purchases to revive a stagnant U.S. economy have pushed down the value of the greenback on the basis these buys would be dollar dilutive,” writes Andrew Johnson. With the forecast for the budget deficit expanding and interest rates expected to remain near zero for the foreseeable future, downward pressures are mounting on the greenback. Look for Tuesday’s meeting to shed some light on the outlook for the dollar, with UUP likely experiencing heavy volumes [see U.S. Dollar Forecast].

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Disclosure: No positions at time of writing.