Why You Should Be Keeping an Eye on the PowerShares DB Dollar Bullish ETF

The world’s reserve currency is full of bull. In fact, you’ll find that the start of the decade’s first bull market circa October 2002 coincided with the U.S. Dollar Index falling below its 200-day moving average.

There are some other coincidences. The weakest year for the Dow in the October ‘02 – October ‘07 bull market was 2005. Ironically, the Dow Industrials was actually negative in 2005. Similarly, the U.S. dollar actually gained ground against world currencies in 2005. (It was the only year since 2001 to have done so.)

For the most part, in fact, the U.S. dollar steadily declined throughout the decade’s 2002-2007 stock market prosperity. And, its precipitous descent often helped foreign equities achieve 2x-3x the upside of U.S. company shares.

It may be happening again. In May of 2009, the U.S. Dollar Index fell below its 200-day moving average… and stocks worldwide have not looked back. Indeed, here on 9/22/09, the U.S. Dollar Index is at a 1-year low. And as it stands, the U.S. currency is only 6.5% away from reaching all-time lows against a basket of world currencies.

On the surface, if many of our invested assets are rocketing higher — from stocks to foreign bonds to foreign currencies to commodities — why does an ever-weakening dollar matter? Our manufacturers export more. Our multinationals earn a large percentage of profits from overseas operations. And our investments seem to be benefiting handsomely.

Art Cashin of UBS (gotta love that last name) served up a belief that any firming up of the U.S. dollar might be the cause of a correction. However, a correction would be welcome news for most. The real threat on unabated dollar devaluation is the ratcheting up of leveraged risk, creating unsustainable asset bubbles. (We see how ugly carry trade unwinding can be when they work in reverse!)

Today, the U.S. Dollar Index is trading at 76.15. A 2.5% breakout above a 50-day moving average to 78 for the buck could spark a correction, though it would not likely end a bullish cycle. Far too many folks believe the dollar will continue an “orderly” decline and will use the cheap dollar to fund their investment into a wide variety of asset classes.

However, a convincing 8% spike higher in the greenback could derail the bull altogether, as carry traders scramble to pay back their dollar loans. Equally worrisome, an 8% drop in ”Uncle Buck” could spark irrational pessimism on the currency’s viability.

In other words, modest downward movement on the U.S. dollar… to a point… appears to help market-based investments worldwide. Modest upward movement might create some profit-taking for a correction phase, but money managers and fund managers will be quick to buy those dips. It’s the more dramatic, more volatile change in the greenback’s standing that investors need to keep an eye on.

ETF investors can use the PowerShares DB Dollar Bullish Fund (UUP) as a U.S. dollar proxy when tracking the prevailing trends. UUP is 2.5% below a 50-day moving average and 8% below a 200-day moving average, much like the U.S. Dollar Index. it has a nearly flawless inverse relationship to the U.S. stock market over the last 6 months, exhibiting a -.90 correlation with the S&P 500 SPDR Trust (SPY).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[knoc:]

What's the advantage to owning UUP as a proxy instead of just owning dollars?

Sep 23 11:40 AM

[Indexor:]

knoc:

The advantage of owning UUP as a proxy instead of simply holding dollars is that UUP will appreciate in value, unlike the money market fund holding dollars. Second, it will act as a hedge against against your foreign bond positions and international stock positions.

Sep 23 12:56 PM