Although there is widespread talk of the dollar losing its status as the world’s reserve due to rising debt in the United States, there is no denying that the greenback is among the best performing major currencies this year.

This highlights the effects of rising interest rates and a sense of risk aversion in stock markets. The proof is in the pudding, and the Invesco DB US Dollar bullish (UUP) is 5.35% higher year-to-date, while the S&P 500 and nearly all fixed-income exchange-traded funds are in the red.

UUP, which hit a 52-week high on Tuesday, tracks the Deutsche Bank Long USD Currency Portfolio Index. This gauge measures the performance of the dollar against a group of other major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Speaking of the yen, the dollar crushes the Japanese currency.

“The dollar jumped to a 20-year high against the Japanese yen on Tuesday, buoyed by the divergence in monetary policy between a Federal Reserve determined to contain soaring inflation and a Bank of Japan that kept interest rates on hold. extremely low interest,” reports Reuters.

This is relevant for investors considering UUP as the yen is the Invesco fund’s second largest exposure at 13.60%, according to transmitter data.

“Morgan Stanley, in his latest research note, said the decline of the yen against the dollar was justified amid deteriorating terms of trade in Japan, with soaring commodities pushing up import costs , as well as contrasting inflation prospects across countries,” Reuters added.

The dollar is also flirting with a two-year high against the euro. Currency market watchers suggest this is another case of divergent monetary policies, as the European Central Bank (ECB) is unlikely to raise interest with the intensity of the Federal Reserve.

Providing some support for the dollar and the UUP, the Fed raised borrowing costs by 25 basis points last month. However, pundits and possibly some Fed members believe the central bank has been slow to act to dampen inflation. This could be a signal that the pace of rate hikes will pick up, perhaps as early as the FOMC meeting in May.

The additional strength of the dollar against the euro would likely further fuel UUP’s rise of $1.04 billion, as 57.6% of the fund is weighted against the common currency. UUP turned 15 in February.

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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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