The Dollar: Up, Up And Away

Includes: DRR, UUP
by: Investment U

By Jason Jennkins

At the end of last week, the U.S. dollar gained against the euro due to the ever-present worries that EU leaders won’t get their act together soon enough to fix their debt crisis. Concern in the market in regards to the European sovereign debt has placed the euro in a precarious situation. The currency will end the third quarter with a 7.5-percent loss versus the dollar.

The U.S. Dollar Index is a measure of the value of the dollar relative to a basket of six specific foreign currencies. It’s a weighted geometric mean of the dollar’s value compared with the following currencies:

  • Euro (EUR), 58.6 percent weight
  • Japanese Yen (JPY), 12.6 percent weight
  • Pound sterling (GBP), 11.9 percent weight
  • Canadian dollar (CAD), 9.1 percent weight
  • Swedish krona (SEK), 4.2 percent weigh
  • Swiss franc (CHF), 3.6 percent weight

The index rose to 78.65, up from 77.92 in North American trade late Thursday and looks like it will end the quarter up 5.8 percent.

Britain to Do a Little Quantitative Easing of Its Own

I just mentioned the troubles of the euro. Also, for the third quarter, the pound has lost 2.6 percent due to the anticipation that the Bank of England could do its best Ben Bernanke impersonation and bring back its quantitative easing program.

Kathleen Brooks, Research Director at, expects continued strength for the dollar for the foreseeable future. “It’s been one hell of a third quarter, and the excitement of recent weeks is likely to continue over the next three months… We end the quarter no closer to a long-term solution to the European sovereign debt crisis, the Bank of England looks poised to do more QE, it could even be joined by the Fed at some stage and the global economic outlook is still a confusing picture.”

Investors Looking to Avoid Riskier Assets

The dollar saw added gains when reports came out last week that presented a dismal outlook for U.S. consumer spending, income and inflation. Investors got spooked on equities, further reducing investors’ interest in assets deemed riskier.

The Commerce Department reported that Americans dipped into their savings accounts in August when their income fell for the first time since 2009. The nation’s savings rate fell to its lowest level since November of that same year. Income fell to a seasonally adjusted 0.1 percent in August. That’s the first monthly decline since October 2009.

Wages and salary income are two main keys for consumer spending and decreased 0.2 percent in last month, which was its biggest decline in eight months. Consumer spending increased a seasonally adjusted 0.2 percent last month, down from a revised 0.7 percent gain in July. And consumer spending, adjusted for inflation, was unchanged in August.

The Play For a Strong Dollar

I know it sounds like we’ve been beating the same drum for a while now, but all the market information keeps pointing to those plays we’ve been recommending for the last few weeks. The best plays against the Eurozone crisis and a strong dollar are the Market Vectors Double Short Euro ETN (NYSE: DRR) and the PowerShares DB US Dollar Index Bullish (NYSE: UUP).

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