Friday, August 15, 2008

The Dollar Is UUP

I know there are many stock pickers out there who never thought they would put on commodity positions until a spate of commodity-related ETFs began appearing. Perhaps the next frontier for these former “equities only” investors is currencies.

Clearly currencies aren’t for everyone and in some respects they are the ultimate zero-sum game, but if anyone doubted their importance, just look how the markets have changed since the dollar reversed its course and started moving up a month ago.

The chart below shows the UUP ETF, the dollar ETF whose formal name is the PowerShares DB US Dollar Bullish Fund. This ETF is based on the Deutsche Bank Long US Dollar Index Futures Index, where futures contracts are designed to replicate the performance of being long or short the US Dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. For more details, a good place to start is the UUP fact sheet.

It is important to note that while the dollar has made a substantial move over the course of the past month and is now breaking out of a three year downward channel, the dollar’s move is more the result of increasing concerns about foreign economies than it is about strength in the U.S. economy. The bottom line: the U.S. economic outlook has not improved over the past month; instead, things have taken on an even gloomier tone overseas.

Finally, I would be remiss in not pointing out that on balance, U.S. equities tend to react favorably to a rising dollar. The chart of the UUP shows the dollar’s rally off of the July low buffeting the S&P 500 index.

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