Barron's(11/23) Dollar Bulls, Here's Your Trade
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Sat Nov 21 00:09:32 2009 EST
(From BARRON'S)
By Bob O'Brien
The conventional wisdom on Wall Street has always counseled against catching
a falling knife. And perhaps no knife has fallen in 2009 quite as spectacularly
as the dollar. While the Standard & Poor's 500 has risen 61% since March, the
U.S. Dollar Index has lost 15%, an exceptional move for currencies. That drop
has deposited the DXY -- as the index is popularly known, for its symbol on
most quote systems -- to within a hair of its record low touched in March 2008.
But few trades these days are as crowded as dumping the dollar (see Up and
Down Wall Street Daily, "Everybody's Dissing the Dollar," Nov. 17). That
creates an opportunity for investors to go the other way, with the PowerShares
DB US Dollar Bullish Fund (ticker: UUP).
"We're sitting at the very bottom of any value that we've ever seen in the
dollar," says T.J. Marta, chief market strategist at Marta On the Markets.
The dollar's weakness is due to the Federal Reserve's insistence on keeping
U.S. short-term interest rates close to zero, even as Washington runs the most
humongous budget deficit ever seen outside of wartime. As a result, the world
is flooded with dollars, which has boosted the euro to $1.50 in recent trading
sessions. That's the richest the euro has been since August 2008 relative to
the dollar.
Since the late October low of $1.27, the euro has risen 17% against the
greenback, while the DXY, which measures the dollar's performance against a
basket of currencies including the euro (with a 57.6% weighting), the yen
(13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish
krona (4.2%) and the Swiss franc (3.6%) -- has declined 15%.
It's unusual to see the dollar move this dramatically in so short a time
frame. In the past three decades, there have been only four years in which the
euro (or its predecessor currencies) has moved in excess of 20% against the
dollar.
There are signs of frothiness in the short-dollar trade. For much of the past
six months, currency traders have used strong domestic economic data as
provocation to sell the dollar and indulge an increased appetite for riskier
investments. But in the past week, the data have painted a more mixed economic
picture.
The latest consumer-confidence reading was disappointing. Yet, unlike the
past, this sign of potential weakness in the economy didn't lift the U.S.
currency. When the market reacts the same way to fundamentals, even when those
fundamentals have changed, it may evidence of speculative excess among
investors.
Even long-term dollar bears concede the buck could start looking more
beautiful. "Short dollar positions have hit extreme levels, so the risks of a
shakeout are high,"' says Kathy Lien, director of currency research at GFT
Forex. But with the Fed likely to maintain ultralow short-term rates through
the middle of next year, she thinks the dollar could fall another 5% to 7%
before it bottoms.
For individual investors who think the dollar has gotten too cheap, at least
in the short term, and want to bet on a rally, the PowerShares DB Dollar
Bullish exchange-traded fund provides a simple play. While the currency market
is the biggest and most liquid in the world, it is dominated by institutions
that trade millions of dollars at a clip. Currency futures and options also are
available, but trading those instruments requires special accounts. ETFs, on
the other hand, can be bought and sold as easily as any stock, and have
provided an efficient way to participate in global markets, including foreign
exchange.
"Most of the currency ETFs are inherently short the dollar, and long the
currency of your choice," Bradley Kay, ETF analyst at Morningstar, says of the
approximately 40 ETFs that mirror the currency market. "The only one that's
long the dollar is the PowerShares DB Dollar Bullish Fund."
(Investors should beware the potential tax bite when selling the ETF. Any
gains will be taxed at higher rates than long-term capital gains.)
There has already been something of a pickup in the Dollar Bullish ETF trade.
Earlier this month, the fund hit its issuance limit. In a relatively brief
period of time, according to Morningstar's Kay, investors had snapped up so
many shares of the fund that assets jumped to nearly $900 million from what had
been about $350 million a couple of months earlier.
Deutsche Bank, the fund's sponsor, said on Nov. 5 it had run out of new
shares of the Dollar Bullish Fund, and wouldn't be able to issue any more for
the time being. However, the bank later received permission from the Securities
and Exchange Commission to boost its share count, and is now able to issue new
shares. The whole process improved the fund's liquidity.
"My sense is that we saw some institutional interest" in going long the
dollar, Dominic Maister, director of ETF research at Morgan Stanley, said.
Even though institutions often play the pioneering role in trades, individual
investors haven't missed their opportunity to bet on a rebound in the dollar.
After all, when trades, like rooms, grow too crowded, folks start to leave. In
today's market, nothing may be more contrarian than buying the dollar. |
