The U.S. dollar is on fire, burning up the charts with bullish fuel. The gains in the greenback have been stunning, with the benchmark U.S. Dollar Index up nearly 8% over the past three months, and higher by some 14.5% in the last six months.
For buck bulls, the arguments for a continuation of a rising U.S. dollar versus rival foreign currencies are downright convincing.
First, there’s the concept that the U.S. economy is improving at a faster pace than the rest of the global economy. This is the so-called “cleanest dirty shirt” in a soiled global economic laundry basket. Given the anemic economic picture in Europe, which is on the verge of recession, it’s easy to understand why this thesis is so persuasive.
Next there’s the dollar-bullish notion that due to said improvement in the domestic economy, the Federal Reserve will, at least at some point in 2015, begin to extricate itself from the near-zero interest rate policy it’s become so comfortable with during the past several years.
While the smart money is betting on a Fed rate hike sometime in the second half of 2015, I remain skeptical that Janet Yellen and her cohorts will actually do anything to disturb the economic, political and market apple cart. Nevertheless, the U.S. dollar is responding to the rising-rate prognosis, and that’s causing the greenback to go higher.
Then there’s the presumption, accurate in my view, that other central banks around the world will take an even bigger plunge toward the debasement of their respective currencies and begin their own form of “quantitative easing.”
Japan’s Prime Minister Shinzo Abe got elected in 2012 on explicit policies designed to depress the yen and reflate the country’s ailing economy. Meanwhile, the European Central Bank (ECB) and its leader “Super” Mario Draghi is ever so close to implementing outright bond buying designed to reflate the eurozone nations, a move that would also be very euro-bearish. Even China has plans to continue loosening its monetary reins.
The bullish drivers here for the U.S. dollar translate into opportunity for investors willing to migrate into this already-crowded trade. But the question now is, how best to do it?
Here are three U.S. dollar bull strategies to ride the roaring buck:
U.S. Dollar Bull Strategy #1 — PowerShares DB US Dollar Index Bullish (UUP)
If you think the U.S. Dollar Index can continue its winning ways, then a good way to ride it higher is to buy the PowerShares DB US Dollar Index Bullish (UUP). This exchange-traded fund is designed to mirror the performance of the aforementioned U.S. Dollar Index, a metric that measures the value of the greenback against its six largest rivals — the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
UUP is perhaps the most direct way to take advantage of the bullish U.S. dollar, but there’s also the leveraged approach to the U.S. Dollar Index. The PowerShares DB 3X Long US Dollar Index Futures ETN (UUPT) employs leverage designed to theoretically achieve three times the performance of the U.S. Dollar Index.
Yet another way to apply this UUP strategy is to buy call options on UUP, akin to the way my colleagues John Jagerson and Wade Hansen recommended back on Dec. 10.
U.S. Dollar Bull Strategy #2 — ProShares UltraShort Euro (ETF) (EUO)
A rising U.S. dollar implies falling rival currencies, and that’s certainly what’s happened in the European countries of the EU, and their shared currency the euro.
The euro now trades at nine-year lows versus the dollar, and that’s a trend that isn’t likely to settle down anytime soon, particular as the ECB prepares to implement its own form of currency-debasing efforts designed to re-ignite the region’s economy and pull up the EU from its current deflationary tailspin.
If you want to bet against the euro while also betting on U.S. dollar strength, then check out the ProShares UltraShort Euro (ETF) (EUO). This currency ETF is designed to deliver performance equivalent to twice the inverse of the daily performance of the U.S. dollar price versus the euro. So, if the dollar moves 1% versus the euro, then EUO should move higher by 2%.
Here again, the leverage in EUO makes it more of a short-term trading vehicle than a long-term hold. That said, medium-term holders who have rode the rising dollar with EUO have seen their investment surge by 31.2% over the past six months.
U.S. Dollar Bull Strategy #3 — iShares Barclays 7-10 Year Treasury Bond (IEF)
In 2014, U.S. Treasury bonds were among the markets best-performing asset classes. One of the reasons why is due to the appetite for treasuries from foreign investors.
The rising dollar has made bedrock assets such as U.S. Treasury bonds very attractive to foreign capital, as a strong dollar means inflation in the U.S. is under control — and low inflation means dollar-denominated assets such as Treasuries are worth more.
That’s why my third U.S. dollar bull strategy is to buy long-term U.S. Treasuries via the iShares Barclays 7-10 Year Treasury Bond (IEF). As its name suggests, this fund holds Treasury bonds with maturities ranging from seven years to 10 years.
Over the past six months, IEF has delivered investors a total return of 5.7%. By comparison, the benchmark measure of the domestic equity market, the SPDR S&P 500 ETF Trust (SPY), has delivered a six-month total return of only 5.5%.
Unlike the hedged currency funds mentioned earlier, this U.S. dollar bull strategy is one that you can buy for your portfolio and hold for the long term — or until such time as long-term interest rates rise and finally start to eat into the value of these bonds.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.
