For several months now, traders have increasingly abandoned the U.S. dollar. While these trades have been profitable thus far, it could be time for a move in the opposite direction.
In the past year, nearly everything has gone up against the U.S. dollar. The largest currency gainers against the dollar have been the Australian dollar and the Swiss franc, which are up 20% and 26.7%, respectively. Despite all of the concerns over Greece and Ireland, the British pound and the euro are both up about 10% on the dollar in the past year. Further, although the Japanese Central Bank has actively entered the market to weaken its currency, the Japanese Yen is up nearly 15%.
At the same time, commodity prices have been soaring in relation to the dollar. Silver and coffee have enjoyed the largest gains, while the spike in the price of crude oil is well known to anyone that has to fill up their gas tank. Even with the pullback in the commodity sector last week, they are still up sharply against the dollar in the past year.
Is the trade overdone? The dollar's decline was predicated on a number of factors -- and now these factors could be moving in the opposite direction. The Federal Reserve has signaled an end to QE2 in June. The political chatter emanating from Washington has been increasingly about how the Federal government can reign in its massive deficits. The CME's decision to hike margin requirements on commodities could continue to weaken the commodity trade.
If the tide turns in favor of the dollar, traders might wish to take notice. Those who think the dollar could rally should consider an ETF such as PowerShares DB U.S. Dollar Bullish (NYSE: UUP). They may also wish to consider putting money against gold, which can be done through the ETF ProShares UltraShort Gold (NYSE: GLL).
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