The Dollar Snaps Back
After the U.S. dollar’s big strength across the past year, the buck broke down in October to bottom at its lowest level since February. But if you weren’t watching the dollar during the Twitter IPO carnival, you might have missed a heck of a snapback in the greenback.
A report from Bloomberg stated, “Pension funds and institutions bought the most dollar-denominated assets in late October since at least January 2009” and the U.S. Dollar Index rallied almost 3% in a week’s time to get back to late-September levels in a snap.
So how do you trade this?
A stronger dollar environment will ultimately keep commodity costs lower, since energy and food and materials priced in U.S. currency are more affordable when the greenback is strong. Check out the return of $3 gas in some states as proof of this ceiling on commodities.
That ceiling is good for manufacturers, but bad for a company like Exxon Mobil (XOM) that gets a lower price for oil and gas in this environment.
A strong dollar also creates headwinds for U.S. based multinationals that will see unfavorable currency exchange rates drag on their foreign sales and profits. The impact isn’t dramatic, but in this environment where every penny of EPS is hard to come by for some corporations, it’s noteworthy that global players like Coca-Cola (KO), Procter & Gamble (PG) or Microsoft (MSFT) will see pressure in a strong dollar environment.
To hedge if the dollar keeps rising? Well, you can always buy the Dollar Index itself via the PowerShares U.S. Dollar Index (UUP) exchange-traded product.