The

Bullish US Dollar Fund

(UUP) - Get Invesco DB US Dollar Index Bullish Fund Report

is running higher. Shares, which touched 52-week lows less than three weeks ago, are up $0.15 to $21.80 today (article published on Options Profits 05/23) and have now added 4% since May 4. Trading in UUP options is also brisk Monday. 30,000 calls and 2,730 puts so far. Investors are showing the most interest in the September and June 22 call options. It appears that both contracts are being bought Monday morning, as players in the options market are taking positions in out-of-the-money calls on the dollar fund in anticipation of additional gains for the ETF during weeks/months ahead.

The recent rebound in UUP has a lot to do with weakness in the euro. Against the dollar, the European currency has plummeted from 16-month highs of 1.49 in early-May to two-month lows of 1.405 midday Monday. The euro is reeling Monday after Standard & Poor's lowered its rating on Italy's debt to negative from stable. The move has rekindled fears that the European debt crisis is still worsening.

Adding to the list of worries facing the euro-zone is last week's arrest of IMF chief Dominique Strauss-Kahn. The IMF head resigned after being charged with rape of a housekeeper at a luxurious New York hotel. DSK was a key negotiator between Euro-zone nations. For instance, Strauss-Kahn was seen as instrumental in persuading Germany to help weaker countries in the periphery like Greece and Portugal. Many Germans are opposed to using their capital to cover the debt burdens of other Eurozone nations.

Euro weakness is an important driver for gains in the bullish dollar ETF. UUP is an exchange-traded fund based on the Deutsche Bank Long US Dollar Index (USDX) . While the index is designed to track the performance of the buck against a basket of other currencies, it is heavily weighted against just a few. The euro/USD pair accounts for about 58% of the value of the portfolio. The table below offers a recent breakdown of the USDX.

While the euro is under pressure against the greenback, the dollar is beginning to make some strides against the Japanese currency as well. Since May 5, the buck is up to 81.8 from 80 against the yen, or 2.2%. The yen had rallied sharply during the previous month, but is weakening as the Japanese economy continues to suffer from the March quake and poor data keeps rates low for the foreseeable future. Interest rate differentials between nations are the key driver for long-term currency movements. The yen also faces headwinds from the prospect of further intervention into the currency market from the Bank of Japan, which has already intervened in 2011 to slow appreciation in the yen to help its export-driven economy. The USD/yen currency pair accounts for 13.6% of the Bullish dollar fund.

Meanwhile, the British pound is also feeling the weight from the problems in the euro-zone. Against the dollar, GBP is down 3.6% month-to-date. While the British currency had performed well during the first four months of the year on expectations of rate hikes from the Bank of England, the rally has now stalled after BOE Governor King recently sent a letter to the government stating that rate hikes to rein in inflation are likely to result in an undesirable slowdown in the economy. The combination of diminishing rate hike expectations and problems in Euro-zone periphery countries are keeping a lid on any rally attempts in the British pound. The GBP/USD currency pair accounts for almost 12% of the Bullish dollar ETF.

Taken together, the euro, British pound and Japanese yen represent a lion's share of the UUP. In fact, these three currency pairs account for 83.1% of the ETF. Meanwhile, the euro is under pressure due to sovereign debt currencies and a lack of leadership at the IMF. The Japanese yen could possibly weaken further on intervention from the BOJ and poor data. Meanwhile, the British pound is lower on diminishing rate hike expectations and debt crisis in the euro-zone. Consequently, shares of the bullish dollar fund are moving higher and, for that reason, players in the options market are positioning for further UUPside in the weeks ahead.

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At the time of publication, Fred Ruffy held no positions in the stocks or issues mentioned.

Frederic Ruffy is an experienced trader and provides daily commentary and analysis of the options market. He is co-founder of the web site, WhatsTrading.com. His work has also appeared in Futures Magazine, Technical Analysis of Stocks & Commodities, Stock Futures and Options, and Sentiment.

In addition to writing market commentary and trading-related books and articles, Fred has also worked as an instructor, educating investors on advanced topics like measuring volatility, the benefits of sector rotation and the risks and potential profits from trading around earnings. An active trader himself, with over 15 years securities industry experience, his market observations and analysis of the options market are featured regularly in the financial press including Barron's, Reuters, The Wall Street Journal, and Bloomberg.

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