Not Too Late to Buy Strong Dollar Winners

by: Todd Campbell

One of the most important market moves this past month has been the shift in sentiment by currency traders on the dollar (NYSEARCA:UUP). Back in August, I went long the dollar assuming Europe was going to struggle to keep sovereign bond yields in check. While the dollar has moved strongly versus the euro (NYSEARCA:FXE), the move is far from over which means there is alot of unwinding still to come, and a lot of opportunity for those looking to play the strong dollar trade.

The dollar ETF (UUP) is liquid and easy-to-trade, as retail investors don't need a separate currency account to buy. Back in August, the UUP was flirting with new lows just shy of $21. Today, it's trading $22.35, a pretty impressive gain given the drubbing in equity and commodity markets. But, even with a 7% gain behind it since mid August, the UUP remains 5% below its 52 week low and 13% below its summer 2010 levels.

But, the dollar itself isn't the only way to benefit from upside. Keep in mind, the drop in the dollar versus the euro supported our exports at the expense of the EU; a dynamic which is shifting daily. As a result, a lot of U.S. manufacturers were benefitting as exports soared. Now, with the dollar rising, the export market may find itself increasingly challenged to compete against European manufacturers.

This could weigh on industrials, impacting sales for the likes of Dow Chemical (DOW) and Caterpillar (NYSE:CAT). At the same time, the weakening dollar - and the need to insulate against risk - helped drive multinationals to new highs. Consumer goods stocks still offer global diversification and predictible revenue, but plays like Coca-Cola (NYSE:KO) lose a bit of their luster in the wake of dollar strength.

It also could help company's here sourcing from overseas, particularly technology stocks and retailers. But, the dollar will have to improve against emerging market currencies to get the biggest benefit. If the dollar continues higher, non-U.S. leisure stocks, and travel related stocks like Priceline (PCLN), become interesting again too.

Of course, the dollar still faces its own set of risks. But, with Europe looking increasingly dysfunctional, the dollar isn't likely to fall against the euro. This suggests any snapback rally in the euro should be sold, and any corresponding drop in the dollar will give investors a good chance to buy.

Disclosure: I am long UUP.