The United States dollar has been in a multi year bear market, with only a couple of respites in selling over the past 8 years. Last year, the dollar rallied strongly on a "flight to safe haven trade" during the worst of the financial crisis. While this rally was very sharp, in the larger picture, it only served as a partial retracement of the bear market decline. More recently, the dollar has been under pressure since March and despite the weak economic outlook, it appears that current fiscal policy favors a weak dollar.
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As traders, we must understand that all markets are interrelated with each other, and we need to account for the implications of a trend move in the dollar. Generally speaking, the dollar and commodities are inversely related, as most commodities are priced in dollars. If the dollar falls, it takes more dollars to purchase the same physical commodity. Thus the price for that commodity rises. While at times market relationships can decouple, eventually this inverse relationship holds true. So what are some ways to play the move in the Dollar using ETF's?
The first way is through the use of an ETF that tracks the US Dollar Index. The Powershares DB US Dollar Index Bullish ETF (NYSE:UUP) is a leveraged product that can be used to trade the US Dollar. In the chart, the first thing that stands out is that the dollar has been falling for the past four months. This is evident by the declining 50-day moving average. UUP was attempting to consolidate in the $24 dollar area, but broke out of that range to the downside and failed an attempted bounce from the prior low near $23.50. With the dollar breaking down under the recent lows, it could light a fire under commodity based ETF's and stocks.
