#240: What's happening to UUP?
In this email:
What is UUP?
Pre-Trump vs first two months of Trump 2.0
IMO: DCA UUP
What is UUP?
UUP is the ticker symbol for the Invesco DB US Dollar Index Bullish Fund ETF, which is intended to track the Deutsche Bank Long USD Currency Portfolio Index.
Buying UUP can effectively function as an expression of betting on the strengthening of the US dollar relative to a basket of major developed market currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc
UUP is down ~3% for the year - notably, the US Dollar's weakened almost 5% relative to the Euro
UUP performance — pre-Trump vs first two months of Trump 2.0?
Pre-Trump
In the year leading up to the Nov-2024 election, UUP rallied ~9%
The US dollar rallied against most others during this time as US yields were high (making the dollar an attractive asset)
US economy was strong (there was less talk of "recession fear")
There was expectation that US rates may stay higher for longer, as inflation will pick up (market assigning higher probability on Trump win over Harris win, which ended up being the case)
First two months of Trump 2.0
Since Trump’s taken the oval office for the second time, UUP’s sold off ~4%
Tariffs could spur inflation and keep US yields higher, but the bigger factor the market currently is focusing on is recession fear and economic shock consequence after tariffs.
With looming stagflation fear (high inflation but also high unemployment), the market is pricing in greater probability of lower rates (and further Fed cuts) → this makes the US dollar a less attractive asset
IMO: DCA UUP
For those looking to add a nontraditional hedge to their portfolio (i.e. 5% of portfolio), I would, for the time being, regularly buy UUP in a 2~4 year time horizon.
Here’s why:
Tariffs are bad for the dollar index, but in the longer run, it’ll hurt other countries even more
Thinking on a medium term horizon, current level of UUP is cheap relative to its recent highs of $30.50
In the rare case scenario, where tariffs spur inflation but the US labor market actually turns out to be not too bad, the Fed will keep interest rates higher for longer → owning UUP is not a bad hedge for this scenario.
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