As the dollar has been rallying hard against the euro, exchange traded funds (ETFs) that are bullish on the dollar have benefited. The dollar has done this as a U.S. slowdown has spread to other foreign economies.
Jack Crooks for MoneyandMarkets explains some of the many foreign economic problems that the dollar is rallying against.
Germany, for example, has seen industrial orders drop sharply in June by 2.9%. The International Monetary Fund’s latest forecast calls for lower economic growth in the UK, and predictions have fallen from 1.8% to 1.4% in 2008 and from 1.7% to 1.1% in 2009.
Australia is also battling slow household spending and a financial sector that is facing many challenges. Similarly, the New Zealand Treasury is anticipating a second consecutive quarter of negative GDP growth. This means that after the release of these numbers, New Zealand will have officially entered into a recession.
China also faces some economic obstacles, even as the Olympics have just begun. With air pollution being a big issue, China has forced 105 Beijing factories to close and may have to close down more. Also, many companies face a problem with an overwhelming back up of inventory that was pushed into production to prepare for the Olympic Games. This means growth will be sacrificed for however long it takes to work through this oversupply.
Amidst the many economic problems that countries across the globe are facing, the dollar has rallied, particularly as crude oil prices fall. Crooks reveals the tight inverse correlation between the dollar and oil prices. As oil prices have been sliding, the dollar has gained despite, dismal news from the US economy day after day.
The dollar has been able to continue this rally, even with many different announcements made by the Central Bank. Jack Crooks feels as though it is time to keep the dollar in sight, especially as other economies start to catch the economic bug.
Some have been wondering if the dollar can sustain its run. The concern is that if we prop it up, our goods and services might not be as enticing from a value standpoint. However, new information from overseas seems to indicate that they may be in the fourth or fifth inning of an economic downturn, while we’ve already felt the brunt. Those foreign economies might have to cut interest rates, further propping up the dollar.
The bottom line is: we can tell you five reasons it will go up, and another five reasons it will go down. It’s in an uptrend now, and you can’t fight the trend.
An ETF that is bullish on the dollar is:
- PowerShares DB US Dollar Index Bullish (UUP), down .4% year-to-date, but up 6.1% over the past month.
For full disclosure, some of Tom Lydon’s clients own shares of UUP.