How to Trade U.S. Dollar Volatility for Big Profits
It’s no secret that the U.S. Dollar (NYSE:TLT) has been in freefall and investors of all stripes can profit from both the dollar’s fall and its eventual turnaround, when, not if, that comes.
The dollar has been hammered in recent months by the Federal Reserve’s zero interest rate policy and “quantitative easing,” along with budget deficits and the recognition that the United States apparently is hoping that a weak dollar will help boost our struggling economy.
Taking a look at the U.S. Dollar chart we can see how far the Mighty Buck has fallen.
Chart courtesy of Stockharts.com
From the chart you can see the steady decline over the past ten years and that the Dollar is approaching multi-year lows set back in 2008 at the peak of the financial crisis. The warning last week from Standard and Poor’s (NYSE:MHP) regarding U.S. debt and a potential downgrade if we don’t get our fiscal house in order further strengthened the argument that the dollar has farther to fall, as a currency’s strength is largely viewed as a “credit rating” of that country’s economic outlook. Strong economies tend to have strong currencies and most analysts expect the dollar’s decline to continue.
If you’re in the declining dollar camp, a bearish dollar ETF (NYSE:UDN) could be right for you.
Chart courtesy of Stockcharts.com
(NYSE:UDN) the PowerShares Bearish Dollar exchange traded fund is designed to track the Deutsche Bank (NYSE:DB) Short US Dollar Futures Index. It invests in short futures contracts and so gives exposure comparable to being short the U.S. Dollar against foreign currencies like the Euro, Yen, British Pound and Canadian Dollar (NYSE:FXC).
UDN (NYSE:UDN) has more than $150 million under management but one must read the prospectus carefully as ETFs that invest in futures contracts can behave and be taxed with significant differences compared to regular exchange traded funds.
For now, it appears that the dollar will remain under pressure as interest rates stay low and the United States continues its fragile recovery. However, one day interest rates are sure to rise, and at that point one would need to look to a bullish dollar exchange traded fund to participate in what could likely be a strong dollar recovery.
Disclosure: No positions in ETFs or stocks discussed in this article.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.