Share This Article

Facebook LinkedIn
Twitter Reddit
Print Email
Pinterest Gmail
Yahoo
Money Morning
×
Login Archives Your Team About Us FAQ
[mmpazkzone name="azk58712-mobile-nav" network="9794" site="307044" id="222451" type="5"]
  • Subscribe
Enter stock ticker or keyword
×
[mmpazkzone name="azk58712-mobile-sticky" network="9794" site="307044" id="222451" type="5"]
Join 100,000+ Like-Minded Investors Today
Twitter
Tags: Currencies
Stocks: PLAY

Why the U.S. Dollar Is Getting Stronger - and How to Play It

By David Zeiler, Associate Editor, Money Morning • @DavidGZeiler • September 15, 2015

Start the conversation

Leave a Reply Click here to cancel reply.

You must be logged in to post a comment.

The year-long rally in the U.S. dollar has slowed, but it's far from over.

From July 2014 to March of this year, the U.S. Dollar Index (DXY) has soared by 25%. Since then, it has pulled back slightly. But the forces that drove the U.S dollar higher remain in place and will intensify in the months ahead.

CurrenciesThat means investors can expect a stronger U.S. dollar against most foreign currencies, including the euro, the Japanese yen, the Australian dollar, and the Mexican peso.

It matters because the value of the U.S. dollar holds a pivotal spot in the world of investing.

"The U.S. dollar is the oxygen of the global economy. Everyone takes it for granted, but it determines the value of every financial instrument in the world - stocks, bonds, commodities, real estate, art, collectibles, you name it," said Money Morning Global Credit Strategist Michael Lewitt.

Why a Strong U.S. Dollar Matters

Specifically, the strong U.S. dollar is the main reason that prices for commodities like oil, copper, and aluminum are down. Because commodities are priced in dollars, a more valuable dollar buys more of them for less money.

The rising U.S. dollar has also hurt the earnings of U.S. corporations with significant overseas businesses. The strong U.S. dollar makes U.S. exports more expensive.

Finally, the strong U.S. dollar has made life miserable for emerging markets. Governments and companies borrowed a lot of money denominated in dollars, Lewitt said. A stronger dollar makes those debts more expensive to repay.

So how can we be so sure the U.S. dollar will keep rising?

Simple, Lewitt said. While the U.S. Federal Reserve has spent the past year winding down its quantitative easing policy, other major central banks - particularly the European Central bank (ECB) and the Bank of Japan (BOJ) - have ramped up their monetary easing.

Such QE policies weaken currencies.

But the Fed is now going against this global tide. Regardless of whether it raises interest rates this week, it has signaled its intent to do so this year or early in 2016.

"Even if the Fed doesn't move, the ECB and Bank of Japan are committed to further weakening their currencies. That means further dollar strength can be expected," said Lewitt.

And that's going to be tough on several currencies in particular...

The Euro, Yen, and Peso Have All Slipped Against the U.S. Dollar

Here's what the U.S. dollar is doing against some key currencies:

  • The U.S. Dollar-Euro Pair (USD-EUR): A year ago, the euro was worth $1.30; now it's down to $1.12. The euro's downward trend got a push from the ECB's first QE program in January. Several big banks, including Barclays Plc. (NYSE ADR: BCS) and Bank of America Corp. (NYSE: BAC) have forecast the euro will drop to parity with the U.S. dollar by the end of the year and will fall below the $1 level in 2016.
  • The U.S. Dollar-Yen Pair (USD-JPY): As recently as October 2012, $1 was worth 80 Japanese yen. Now $1 is worth more than 120 Japanese yen. That's a 50% change in three years. The BOJ's determination to further weaken the yen is expected to drop it to 130 against the U.S. dollar by the end of 2016 and 140 by the end of 2017.
  • The U.S. Dollar-Yuan Pair (USD-CNY): The Chinese government shocked the world in August when it loosened some of its controls on the yuan, causing it to plunge 2.1% in a day. The Chinese yuan is down 2.6% against the dollar for the year. According to a CNNMoney survey of economists, the Chinese yuan will fall another 2.8% against the U.S. dollar by the end of 2015 and further still in 2016.
  • The U.S. Dollar-Peso Pair (USD-MXN): The Mexican peso is down more than 21% against the U.S. dollar over the past 12 months. The Mexican peso has been slammed by the big drop in oil prices, forcing the Mexican central bank to sell U.S. dollars to try to prop up its currency. But here the worst is over. Forecasts call for the Mexican peso to stabilize then gain a little ground back from the U.S. dollar in 2016.
  • The U.S. Dollar-Australian Dollar Pair (USD-AUD): The Australian dollar has been hit by that nation's exposure to a slowing Chinese economy as well as the plunge in commodity prices. The Aussie dollar is down about 22% against the U.S. dollar over the past year. It's currently at about $0.71 to USD $1. ANZ Research predicts the Aussie dollar will slip a bit further - possibly as low as $0.60 - before recovering back into the low $0.70 range next year.

What Investors Can Do About the Strong U.S. Dollar

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

While a rising U.S. dollar will continue to cause problems for some, it also represents an opportunity for those who know how to play it.

"Investors can profit from the dollar rally by investing in dollars and selling short euros and yen," Lewitt said.

He suggests three ETFs:

  • Buy the ProShares DB US Dollar Bullish ETF (NYSE Arca: UUP), which closely tracks the exposures in the DXY. This ETF rises when the dollar rises.
  • Buy the ProShares Short Euro ETF (NYSE Arca: EUFX). This ETF rises when the euro falls.
  • Sell short the Guggenheim Currency Shares Japanese Yen Trust ETF (NYSE Arca: FXY). This short position will rise in value as the yen weakens.
  • Buy the ProShares Short MSCI Emerging Markets ETF (NYSE Arca: EUM) to profit from continued weakness in emerging markets. This ETF rises when emerging markets stocks weaken.

Someday, of course, the U.S. dollar will collapse from the weight of the $18.4 trillion U.S. national debt and the more than $4 trillion the Fed added to its balance sheet through several bouts of QE.

But for now, it's time to profit from a stronger U.S. dollar.

The Bottom Line: The U.S. dollar has grown much stronger over the past year - and will continue to do so as foreign central banks ease monetary policy while the U.S. Federal Reserve tightens. Knowing that the dollar will rise, now is the time for investors to position themselves to profit.

Sure Money: Michael Lewitt's reports are "required reading" among high-net-worth investors who depended on his forecasts and advice through the 2001 and 2007 market crashes. Now he's just released his most critical update yet, and it's available to you for free. The Super Crash Report outlines in clear, express detail exactly what Michael is expecting in the next 12 months. Click here to download this report and get all of Michael's indispensable research through his Sure Money service.

David ZeilerDavid Zeiler

About the Author

Browse David's articles |

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

… Read full bio

ABOUT MONEY MORNING

Money Morning gives you access to a team of market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

QUICK LINKS
About Us How Money Morning Works FAQs Contact Us Search Article Archive Your Team Text Messaging Terms of Use
TOPICS
AI Investing Best Stocks to Buy Stock Forecasts Stocks to Sell Now Technology Stocks Best REITs to Buy Now IPO Stocks Penny Stocks Dividend Stocks Cryptocurrencies How to Trade Options Best Trades to Make Now Options Trading Strategies Weekly Trade Recommendations Income Investing Guide Retirement Articles Special Investing Reports Meet Our Experts
PREMIUM SERVICES
Money Map Press Home Fast Fortune Club Microcurrency Trader Rocket Wealth Initiative Quantum Data Profits Darknet Alpha Accelerators Brutus Alerts Resource Traders Alliance Rob Roy Trader Long-Term Equity Profits

© 2023 Money Morning All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning.

Address: 1125 N Charles St. | Baltimore, MD, 21201 | USA | Phone: 888.384.8339 | Disclaimer | Sitemap | Privacy Policy | Whitelist Us | Do Not Sell or Share My Personal Information