The mad dash to all things safe has taken over the stock market as well as the world of currencies. In the stock market, the safety sectors are the utilities and consumer staples. When it comes to currencies, the choice has been the U.S. Dollar.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

The PowerShares DB US Dollar Index Bullish ETF (ARCA:UUP) is trading at its near the 52-week high after a rally of over 5% in the month of May. The rise in the greenback has coincided with the drop in the euro versus the U.S. Dollar. The euro has broken below the $1.24 level for the first time in two years and the Rydex CurrencyShares euro ETF (ARCA:FXE) fell all but two days during the month of May.

Greenback
The recent ascent of the U.S. Dollar has a lot to do with the safety of the currency as well as the rebound in the U.S. economy in the last two years. However, there is also the argument that the only reason the greenback is doing so well is because it is viewed as the best of the worst. The european Union (EU) has well documented issues at this time and foreign central banks have stepped in to keep a lid on currencies of other nations. The de facto winner is the U.S. Dollar.

By investing in UUP, investors will be tracking the U.S. Dollar Index, which is an index that is intended to replicate the performance of being long the greenback versus a basket of foreign currencies that includes the euro, Japanese Yen, British Pound, Swedish Krona and Swiss Franc. The index uses futures contracts to achieve this strategy.

SEE: Building An All-ETF Portfolio

Euro
The financial troubles in Greece have now spread to Spain and Italy, raising fears in the EU. Not only are investors selling shares of any related stocks, the euro has also been a victim of the mass exodus out of EU-related investments.

The shares of FXE have broken all major support and the next stop for the ETF could be the low of 2010 at $118.79. Until a resolution to the Greece situation is found and the future of Spain in the EU is certain, it appears the trend of lower euro prices will continue. Keep in mind that the currency is extremely oversold and that a bounce at some time in June is likely, as shorts will be forced to cover on any positive news out of the region.

The Other Currencies
For years, the Japanese Yen and Swiss Franc were considered the safety currencies for investors around the globe. During 2008, when the S&P 500 fell by 38% the Rydex CurrencyShares Japanese Yen ETF (ARCA:FXY) and Rydex CurrencyShares Swiss Franc ETF (ARCA:FXF) rose by roughly 17 and 2%, respectively. Intervention by the Bank of Japan and the Swiss Central Bank to keep their currencies from rising too quickly has artificially kept the ETFs from continuing their uptrends. All investors should realize it is not the best strategy to fight the Fed or any other central bank around the globe.

SEE: What Are Central Banks?

The Bottom Line
In the short-term, a fall in the value of the U.S. Dollar could be likely due to such a dramatic rally in a short time frame. However, in the intermediate-term, the greenback appears to be positioned well heading into the end of the year. Unless a dramatic move is made by the EU or its peers to stabilize the debt crisis, the trend should remain higher for UUP.

The future of the euro is not dependent on whether Greece stays in the EU. The euro will depend more on Spain and its ability to shore up its economy and debt issues. If the outcome is positive for Spain, the euro will likely rebound with the global equities market.

One thing is certain, the next six months will have many rallies and sell-offs for investors to buy and sell into.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Growth

    Take a close look at the Vanguard Small-Cap Growth ETF, which focuses on domestic small-cap equities with a fundamental growth strategy.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  7. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  8. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  9. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!