ETFs tracking the U.S. dollar are gaining investor attention as the greenback faces increased pressure amid increasing global trade tensions and indications of a weakening U.S. economy. As sentiment turns bearish at a record pace, ETFs such as Invesco DB U.S. Dollar Index Bullish Fund (NYSE:UUP), Invesco DB U.S. Dollar Index Bearish Fund (NYSE:UDN), and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSE:USDU) are becoming crucial tools for investors trying to deal with the volatility.

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The most popular dollar ETF is UUP, which provides exposure to the greenback versus a basket of currencies including the euro, yen, and pound. It’s constructed to profit when the dollar rises -- but has underperformed in recent days as bearishness sets in, dipping 3% in the past month.

For those investors seeking to benefit from a falling dollar, the UDN provides inverse exposure to the same basket. UDN benefits when the dollar falls, and recent price action indicates that the tide may be shifting in its direction. The fund has gained 3.8% in the past month.

At the same time, the USDU offers a wider, more dynamic exposure, such as the Chinese yuan, Mexican peso, and South Korean won. This may interest investors looking for more diversified currency exposure as the global trade environment evolves. However, the fund has lost about 2% in the past four weeks as currencies across the world remained volatile.

These ETFs are being used more and more to take views on the dollar’s path -- and for good reason.

The greenback is no longer on a high horse. A Bloomberg dollar gauge plunged to a new six-month low on Friday after China struck back in the trade war, hiking levies on all U.S. imports from 84% to 125% from April 12. That news alone would be sufficient to spook markets -- but it was followed by figures that the U.S. wholesale prices declined by the largest amount since 2023, indicating that inflation is still muted at the very moment that tariffs are poised to push prices higher.

The spillover was prompt. Options investors went short on the dollar for the first time in half a decade, while a Z-score measure -- tracking how far the current positioning departs from historic standards -- marked the steepest shift in sentiment ever recorded, according to Bloomberg. One-month risk reversals inverted in favor of downside protection in the dollar, confirming the narrative that investors are dumping ingrained perceptions about the greenback as a refuge asset.

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Markets across the board are getting hit. The S&P 500 dropped 3.5% on Thursday, long-term Treasuries declined, and traders are now pricing in almost 90 basis points of Fed rate reductions for the year. Although the S&P 500 closed 1.8% higher on Friday, the heat is building in the market with pressure on the Federal Reserve to respond to tariffs compressing growth and inflation cooling. Policymakers may have no other choice but to loosen.

The dollar’s largest decline in over two years highlights just how rapidly investor attitude can change -- and for those who want to hedge currency exposure or bet on additional swings, dollar ETFs are becoming more and more the instrument of choice.

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