The US Dollar Rebound & the Case for Options Income ETPs

The US dollar index (DXY) has rallied above 100 – a major technical level watched by investors. After a year of trading mostly below it, the dollar’s trend may finally have turned upwards. Here’s what that could mean for IncomeShares ETPs that sell options on US-listed assets.

What's going on with the US dollar

The US dollar index (DXY) gauges the general strength of the dollar. It compares the dollar against six other currencies – including the euro and pound. When the index rises, the dollar is strengthening against that basket. In some cases, that can signal an investor “flight to safety”.

That’s because the dollar is the world’s reserve currency. Much of the world’s trade and debt runs in dollars, so investors and central banks keep large dollar reserves. US government bonds are also among the deepest, most easily traded assets around. Investors can move large sums in and out with relative ease. So in a panic, many see the dollar as a trusted place to park their cash. That can draw capital away from “riskier” investments – what’s known as the “dollar wrecking ball” effect.

The chart below shows the monthly price action for the DXY, with each bar representing one month of movement for the index. Since peaking in late 2022, the dollar index has gradually trended lower – before spending the past year consolidating below 100. Now it’s trading back above 100 after what looks like a “double bottom” pattern. That could signal the start of a new uptrend.

What a rising dollar could mean for the broader market

A stronger dollar could weigh on the assets that IncomeShares ETPs hold. Gold and silver are one example. They trade in dollars, so a stronger dollar makes them cost relatively more to foreign buyers. That can reduce global demand for metals. Our Gold+ Yield and Silver+ Yield ETPs hold those metals, so they carry that exposure directly.

US shares can also struggle when the dollar rallies – especially those that earn revenue from other countries. Their global sales convert to fewer dollars for shareholders (all else being equal). That's the exposure our Magnificent 7 and other single-stock ETPs hold. So a rising dollar could put pressure on a good chunk of what these products own.

The case for options income ETPs

A rising dollar might weigh on the underlying assets, but there are two potential benefits for UK and European investors.

First, our ETPs sell options on various assets to generate income. A stronger dollar can sometimes raise market volatility, which could mean higher premiums from selling those options. If the underlying asset trades sideways or drops, those premiums may help improve overall returns.

Second, the ETP collects option premiums in dollars. IncomeShares ETPs are not currency hedged. So, all else equal, a stronger dollar could make those income payouts worth more to UK and European investors. The same exchange rate effect could also lift the pound and euro value of the US assets held inside the ETPs.

Three things to remember

• The dollar index (DXY) has climbed back above 100, a major technical level watched by investors.

• A stronger dollar could weigh on the assets IncomeShares ETPs hold, including gold, silver, and US-listed shares.

• It may also help: more volatility may lift the option premiums these strategies collect. And because the ETPs aren't currency hedged, a rising dollar could lift pound and euro returns.

Capital at risk. For professional investors only. Past performance is not a reliable indicator of future results.