What Lies Ahead for the U.S. Dollar? ETFs to Play Greenback's Outlook

The near-term outlook for the U.S. dollar remains constructive, supported by expectations of Fed rate hikes later this year and an uncertain diplomatic situation between Washington and Tehran, which is boosting the greenback’s safe-haven appeal.

With markets increasingly pricing in a restrictive monetary policy stance from the Fed this year, the dollar could remain well supported throughout 2026. The value of the greenback is closely related to the Fed’s monetary policies, as its value moves inversely with interest rate adjustments by the Fed. Expectations of a hawkish stance by the Fed make the greenback stronger.

However, since currency markets are often driven more by shifts in investor sentiment and expectations than traditional supply-and-demand fundamentals, growing traction behind the “Sell America” trade could prompt investors to reassess their appetite for the currency, creating headwinds for the greenback’s longer-term structural outlook.

As stated in a Yahoo Finance article, global bond and currency investors are considering reviving last year’s “Sell America” trade amid a series of economic policy decisions from Washington. Lately, the greenback has remained under pressure, with the U.S. Dollar Index (DXY) down about 1.28% over the past month and 0.16% over the past five trading sessions.

Looking Beyond Near-Term Dollar Strength

Rising uncertainty over U.S. policy could undermine the greenback’s outlook. Reinforcing this view, Rajeev De Mello, Gama Asset Management’s global macro portfolio manager, is reducing his exposure to the dollar amid policy uncertainty, which he refers to as the “Trump administration premium,” as quoted in the abovementioned article.

Adding further to the greenback’s bearish outlook, Steve Brice, global CIO of group wealth management at Standard Chartered in Singapore, noted that investors dislike uncertainty. As quoted on the Yahoo Finance article, Brice sees the dollar falling around 3%-4% over the next 12 months, as government actions and other factors increasingly weigh on the structural strength of U.S. markets.

Additionally, a Reuters survey of FX strategists suggests that the U.S. dollar will stay firm in the near term before losing momentum later in the year, highlighting the potential transition from near-term strength to longer-term weakness.

Playing Both Sides of the Dollar Trade

Against this backdrop, the dollar’s constructive near-term outlook could make a bullish stance compelling through year-end, particularly if the Fed maintains its hawkish bias.

That said, if concerns over U.S. policy persist and the “Sell America” trade gains further momentum, investors could reassess their appetite for the currency, weighing on the greenback’s longer-term structural outlook. As such, investors may want to transition over the long term from funds that benefit from dollar strength to those positioned for dollar weakness.

This would allow investors to capitalize on the greenback’s near-term strength while gradually positioning their portfolios for a potential longer-term decline in the dollar. While this shift is unlikely to occur in the near term and may unfold primarily after 2026, investors should closely monitor the Fed’s monetary policy and broader economic developments when evaluating their long-term dollar exposure and diversification strategies.

Positioning for Dollar’sShort-Term Strength With ETFs

Below, we have highlighted ETFs that may benefit from a stronger U.S. dollar and are well-suited for investors with a bullish outlook on the greenback.

Investors can consider Invesco DB US Dollar Index Bullish ETF UUP and WisdomTree Bloomberg U.S. Dollar Bullish ETF USDU. Regarding annual fees, USDU is the cheaper option between the two, charging 0.51%, more suitable for long-term investing. USDU also has a dividend yield of 3.74%.

UUP is the more liquid option, with a one-month average trading volume of about 2.09 million shares. It offers investors easier entry and exit while minimizing the risk of significant price fluctuations, ideal for active trading strategies.

Positioning for a Longer-Term Dollar Downturn With ETFs

Although the greenback’s near-term outlook remains favorable, a shift toward dollar weakness is likely to be gradual. Investors looking to capitalize on this longer-term trend may therefore benefit from maintaining a long-term investment horizon.

The following funds can help investors hedge against a weakening dollar while also gaining exposure to opportunities that could benefit as the greenback loses ground. Investors with a bearish outlook on the U.S. dollar can consider Invesco DB US Dollar Index Bearish Fund UDN and WisdomTree Emerging Currency Strategy Fund CEW.

CEW is the cheaper option between the two, charging an annual fee of 0.55%. The fund also has a dividend yield of 2.36%. However, from a long-term investment perspective, UDN appears more favorable, as it is the larger and more liquid option of the two. The fund has an asset base of $108.8 million and a one-month average trading volume of about 81,600 shares.

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This article originally published on Zacks Investment Research (zacks.com).

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