NEW YORK (TheStreet) -- The PowerShares DB US Dollar Index Bullish
(UUP) may strengthen this week as emerging markets show no sign of stabilizing and the eurozone faces deflation risks.
Last week, speculators pulled funds out of emerging-market currencies. One reason was that the Chinese economy underperformed expectations in January, weighing on demand for output from emerging markets, which rely heavily on China for their exports.
Meanwhile, the Federal Reserve cut its stimulus program, pushing interest rates higher. The reduction of excess capital by tightening policy led the Reserve Bank of India to question whether the Fed knew its choices had a global impact.
In an effort to curb outflows of capital, Turkey, South Africa and India all raised their benchmark rates over the past week. The strategy may help stabilize currencies in the short term, but ultimately higher rates will weigh on growth and investment.
Analysts see further selling in emerging-market currencies, which should drive the U.S. dollar higher.
Furthermore, the eurozone released an inflation figure last week of 0.7% annual growth, well below the European Central Bank target of 2%. Such tepid price increases in Europe have brought about fears of deflation.
The ECB meets on Thursday to discuss policy, and deflation will certainly be one of the points of interest. Although the ECB may not cut rates again, it may consider some other form of stimulus.
In either case, deflation is an issue, and with policy in both the U.S. and Europe beginning to diverge, expect the dollar to outperform the euro in the months to come.
Lastly, the Fed announced a cut in stimulus last Wednesday because it sees the U.S. economy gradually improving. On Thursday, it was announced that gross domestic product in the fourth quarter rose 3.2%, but the country's employment situation remains a gray area.
The projection for nonfarm payrolls number is 184,000 jobs added in January, which would be a strong number. The U.S. dollar could face some headwinds if the payrolls figure misses estimates, but compared with its foreign competitors, the dollar is one of the strongest currencies on the market.
data by YCharts
At the time of publication, the author had no position in the fund mentioned.
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