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The U.S. dollar hit a three-month high against the basket of other currencies buoyed by the Fed’s hawkish stance. Federal Reserve Chair Jerome Powell warned that interest rates might need to go up faster and higher than expected to rein in inflation.

Investors seeking to make a play from this trend could consider ETFs such as Invesco DB US Dollar Index Bullish Fund (UUP - Free Report), WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report), iShares Russell 2000 ETF (IWM - Free Report) and WisdomTree Japan Hedged Equity Fund (DXJ - Free Report).

The latest rounds of strong economic data and prevalent inflation has put a steeper-than-expected rate hike back on the table. After slowing the pace in recent months, the central bank will likely raise its key interest rate higher than anticipated and could resume larger hikes, citing a recent surge in job growth and inflation. The Fed Chair Jerome Powell turned hawkish during his testimony to the Senate Banking Committee and opened the door to a half-point rate hike in March.

Fed funds futures traders are now pricing in a roughly 60% probability that the Fed will hike rates by 50 bps at its Mar 21-22 meeting. The probability had been seen at around 22% a week ago.

Further, the bets of an aggressive rate hike raised fears of recession once again, driving the appeal for the greenback as a safe-haven play.

The move is expected to pull in more capital into the country and lead to an appreciation of the U.S. dollar. A strong dollar attracts foreign money from investors seeking dollar-denominated returns, providing an edge to domestic-focused companies. Further, energy cost in America decreases with a stronger dollar, thereby lowering industrial cost, increasing profitability, and propelling the overall economy.

Let’s now discuss the ETFs in detail:
 

UUP

Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies. This is done by tracking the Deutsche Bank Long USD Currency Portfolio Index - Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, Invesco DB US Dollar Index Bullish Fund allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound.

The fund has managed an asset base of $1.3 billion while seeing an average daily volume of around 3.4 million shares. UUP charges 77 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
 

USDU

WisdomTree Bloomberg U.S. Dollar Bullish Fund is another way to play the rise in the dollar directly. It offers exposure to the U.S. dollar against a basket of foreign currencies by tracking the Bloomberg Dollar Total Return Index. WisdomTree Bloomberg U.S. Dollar Bullish Fund exhibits strong negative correlations to international equity and bond portfolios.

WisdomTree Bloomberg U.S. Dollar Bullish Fund has amassed $319.6 million in AUM and trades in a good volume of about 242,000 shares per day on average. It charges 50 bps in annual fees.
 

IWM

A strong dollar provides an edge to domestic-focused companies as small caps do not have much exposure to the international market. iShares Russell 2000 ETF will benefit from a rising dollar. It provides exposure to a broad basket of 1,929 stocks by tracking the Russell 2000 Index, with none holding more than 0.3% of assets. iShares Russell 2000 ETF is the most popular and liquid choice in the small-cap space, with an AUM of $54.1 billion and an average trading volume of around 20 million shares.

iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.
 

HEFA

The strength in the greenback would compel investors to recycle their portfolios into currency-hedged ETFs. This is because a strong greenback eats away foreign investment gains when repatriated in U.S. dollar terms, pushing them into the red even when international stocks perform well.

For those seeking exposure to the rising Japanese market, WisdomTree Japan Hedged Equity Fund could be an intriguing pick. With an AUM of $1.6 billion, it targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.

WisdomTree Japan Hedged Equity Fund trades in a solid volume of 335,000 shares per day and charges 48 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium-risk outlook.

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