Wednesday’s ETF To Watch: PowerShares US Dollar Index Fund (UUP)

by on April 27, 2011 | ETFs Mentioned:

Thanks to rising prices for a variety of key staples– most notably oil and food commodities– the pressure has been on central bankers around the world to step up rates and curtail inflation. A rate hiking campaign has already begun in some markets, even in the euro zone where a number of economies remain under heavy pressure due to spiraling debt costs. Despite these movements by a number of other key banks, so far the Fed has avoided raising or even hinting at hiking the key benchmark rate. However, investors could get further insight on this trend and if it could reverse in the near future at the conclusion of today’s important Federal Reserve meeting in Washington D.C.

Investors are largely expecting the Fed to keep the status quo; no early end to the bond buying program and no change in interest rates despite the moderately improving economic situation and rising commodity prices across the board. However, the pressure may be mounting on the Fed to do something as the U.S. dollar is approaching levels unseen since before the market crash of 2008 and the euro zone has bumped up rates despite shaky economies in many of its peripheral members. “The Fed is trying to walk this very difficult, fine line,” said John Silvia, chief economist at Wells Fargo in a recent interview. While the Fed isn’t likely to initiate a third quantitative easing program, there will be some on the Fed committee who will say, “Wait a minute. We can’t really pull this back until we see more sustainable growth, or some kind of direction of where inflation is going.” [see Ten ETFs To Own When The Fed Raises Rates]

Furthermore, in an unprecedented attempt at added transparency into the bank’s decisions, Bernanke will be holding a live news conference immediately following the rate decision. The meeting is scheduled to last 45 minutes and looks to include both a statement from the Chairman as well as questions from the media. Additionally, the quarterly forecasts for growth, employment, and inflation, will be released at the start of the news conference as opposed to being revealed roughly three weeks later at the release of the Fed minutes. Thanks to this change, investors may be able to glean more from Fed meetings than usual, possibly helping them to get a better idea of when the central bank is looking to raise rates or change its focus on stimulus measures [see Bond ETFs That Steer Clear Of Interest Rate Risk].

Thanks to the conclusion of this important meeting, investors should look for the PowerShares DB USD Index Bullish Fund (UUP) to remain in focus throughout the day and have a very active afternoon session in particular. The fund tracks the Deutsche Bank Long US Dollar Index Futures Index which is a rules-based benchmark that is composed solely of long USDX futures contracts. These contracts are designed to replicate the performance of being long the American dollar against a basket of developed market currencies including; the euro, yen, British pound, Canadian dollar, krona and the franc [see more on UUP's fact sheet].

Should Bernanke and company suggest an early end to the QE2 program or if they anticipate a quicker rise in rates, it could signal that they believe that the economy is growing stronger and thus boost the US dollar and UUP. If, however, plans for yet another round of quantitative easing seems to be in the works or if investors do not take too kindly to the Chairman’s press conference afterwards, look for UUP to sell off and continue its recent downtrend.

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Disclosure: No positions at time of writing.