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The U.S. dollar has surged to its highest level since November, driven by speculation that the Federal Reserve will maintain elevated interest rates, attracting global investors seeking higher bond yields. This rise marks the dollar's longest weekly winning streak since February, with a Bloomberg gauge recently hitting a one-month high following a stronger-than-expected jobs report that dampened hopes for rate cuts. The dollar market trend will continue to be influenced by various economic and political factors. As investors, what opportunities and risks lie ahead? Let's explore Wall Street's perspective and discover how investors can benefit from these developments.

What causes the strength of the US dollar?

The U.S. dollar's strength is underpinned by the resilient U.S. economy, as evidenced by robust inflation and labor market data, which have reduced expectations for Federal Reserve rate cuts this year and propelled the dollar to new highs. Meera Chandan, Global FX Strategist at J.P. Morgan, highlights that the narrative has changed from "when" to "whether" the Fed will ease, supporting the dollar's rise. While global economic improvement could temper the dollar's performance, the U.S.'s strong economic activity and high-for-longer interest rates provide a solid foundation. The dollar's positive correlation with rising oil prices, particularly in the context of Russia's production cuts, also further bolsters its outlook.

Earlier this year, there was speculation of such divergence as the U.S. outlook for growth and inflation appeared stronger compared to Europe and China. However, recent months have shown a more convergent global landscape. U.S. economic activity has softened, Europe has seen an uptick, and China has demonstrated improved data and policy efforts to address its issues. This convergence has kept the dollar and other major currencies in a relatively tight range, suggesting that, barring new significant divergences, sharp movements in the dollar are unlikely in the near term.

Goldman Sachs Research expects the dollar to retain its gains over the next 12 months, remaining steady against the euro, British pound, and Australian dollar. Kamakshya Trivedi, head of global FX and interest rates strategy at Goldman Sachs, attributes the dollar's stability to limited global macroeconomic divergence and robust U.S. economic growth. "We will continue to live in a strong U.S. dollar world," Trivedi notes. The dollar's strength in 2024, fueled by higher interest rates, sticky inflation, and a resilient economy, has led it to appreciate against nearly every major currency.

How investors can benefit from the US dollar strength?

Long U.S. Dollar ETFs are investment vehicles designed to capitalize on the appreciation of the U.S. dollar (USD) relative to a diverse array of major developed-market currencies such as the Japanese yen, Canadian dollar (loonie), Australian dollar (aussie), British pound, Swiss franc, and the euro. These ETFs achieve their investment objective by holding a mix of futures contracts and swaps. Investors interested in the performance of these ETFs can access a wealth of information through detailed tabs that offer data on historical returns, dividends, fund holdings, expense ratios, and technical analysis.

$Powershares Exchange Traded Fd Tst Db Us Dollar Index Bullish Fund Etf (UUP.US)$ stands out as a prime beneficiary of a rising dollar, offering exposure to a basket of six world currencies by tracking the Deutsche Bank Long USD Currency Portfolio Index - Excess Return, along with interest income from U.S. Treasury securities. The fund allocates 57.6% to the euro and 25.5% collectively to the Japanese yen and British pound.

$Wisdomtree Trust Bloomberg U S Dollar Bullish Fd (USDU.US)$ offers direct exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. Notably, it exhibits strong negative correlations with international equity and bond portfolios. The fund has amassed $280.8 million in assets under management (AUM) and trades an average daily volume of approximately 242,000 shares.

Source: Goldman Sachs, U.S. Bank Wealth Management, J.P.Morgan, Bloomberg, moomoo

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