The Best Assessment Of The U.S. Dollar Is To Assume That It’s In A Bear Market

Most people who have been reading the news lately are aware that the U.S. Dollar’s perception as a sound currency is being attacked on all sides thanks to complaints about deficits, debts, and other U.S. government shenanigans.

Of course it’s easy to trash the government you know, but how are foreign governments doing at managing their currencies?

Are they doing a better job at preserving value for those holding their bonds or cash, or is it a race to the bottom? After all, paper currencies are backed by nothing more than “faith” that the government in charge will do the right thing. Sure, fundamentals count too but it all boils down to confidence that the government won’t steer the economy (and therefore the currency) onto the rocks.

There are a number of securities that can measure the performance of one currency against another (or a basket of them) including futures contracts and the cash forex market, but perhaps you haven’t yet become familiar with currency ETFs.

Currency ETFs are essentially Trusts which can be bought and sold through a traditional brokerage account. They are listed on the NYSE Arca and trade exactly the same way ordinary stock does.

The advantage of such products is that you don’t have to have a forex or futures account to “invest” (or more correctly, speculate) in the future direction of a given foreign currency.

For the sake of a streamlined comparison, we took a look at the currency ETFs offered by investment entity CurrencyShares. This article is not an endorsement of CurrencyShares, but it’s helpful to do currency comparisons using the ETFs provided by one single company for simplification purposes.

There are ETFs which are short (or ultra-short) one currency or another but all the ETFs in this comparison chart are standard ‘long’ ETFs in the named currency:

Here we can see that the Australian dollar is far and away the best performer since February of this year with a better than 40% gain since that time. The Russian Ruble has also done well with an over 30% gain.

The Yen, on the other hand, has underperformed the US dollar and is presently just about breaking even. This is the worst performance of the bunch; even such “powerhouse” currencies such as the Swedish Krona and the Mexican Peso easily outperformed it.

Surprisingly, the Canadian Dollar is also in the middle of the pack, even though its banking system is considered amongst the most stable in the world and (like Australia) it is often considered to be a ‘resource-based’ economy.

So what can we conclude from the above chart?

• Except for Japan, other countries are preserving the value of their currency better than our own, and
• Holding some of these currency ETFs can be a useful hedge against further erosion in the USD

The nice thing is that you can buy (or short) any of these ETFs just as if they were stocks in your regular brokerage account and there’s no need to dabble in futures or forex trading.

Incidentally, you can find more currency ETFs here at this link (http://etf.stock-encyclopedia.com/category/currency-etfs.html) to research products available from other companies.

The U.S. Dollar Right Now

If you’re wondering how the U.S. Dollar is doing when measured against a basket of foreign currencies, then take a look at this chart:

The USD Index failed to reach its 50 day moving average on the last bounce and hasn’t closed over that level in ages. For now the U.S. Dollar appears to have formed a double bottom which suggests that it will bounce at least once more to reach its 50 day moving average. There is strong support at the 75 level and a run to 76 or 76.5 is definitely possible.

You could make such a move with UUP (UUP: 22.26 +0.23 +1.04%) (PowerShares USD Bullish ETF). UUP’s chart mirrors the USD Index (as it should) …

… whereas UDN (UDN: 28.57 -0.29 -1.00%) (PowerShares USD Bearish ETF) moved inversely and performed quite well recently. If buying UUP for a bounce isn’t attractive, then buying UDN at its 50 day moving average may prove a shrewd investment if you’re bearish on the dollar for the long term (and not comfortable buying ETFs that are based on foreign currencies).

In point of fact, looking at a weekly chart of the U.S. Dollar Index, it would seem that a bet on UUP would be a short-lived profit opportunity. Here’s the weekly chart to show how terrible the USD’s performance has been:

There isn’t a whole lot of support evident in that chart, is there? UDN would seem a far safer long-term bet than UUP unless the U.S. Dollar can mount some kind of sustained rally that will establish a bull trend.

Is such a rally in the offing? Certainly the rate of decline has been slowing in recent weeks …

Well, What About Bonds?

The bond yields right now may provide a clue.

A look at the table of bond rates from Bloomberg would indicate that at least some people are loving the U.S. Dollar right now. Why else would they be paying the U.S. government to hold their money for them?

After all, all Treasuries from 12 months and onward are paying negative rates - it seems insane that investors would accept a negative interest rate on a currency that’s underperformed most anything except the Yen this year, but there you have it.

Perhaps these investors are betting on a turnaround that’s just around the corner?

Or maybe they’re just punch-drunk from the damage and being selflessly patriotic.

Only the market can tell us, so right now it’s “wait and see” time.

All that aside, probably the best assessment of the U.S. Dollar and how to play it is to assume that it’s in a bear market. This means a continued downward trend punctuated with short, sharp rallies that scare the shorts and revive the hopes of the dollar bulls.

Until we see a sustained rally, any upward movement in the U.S. Dollar could be considered a shorting opportunity or an opportunity to diversify into other currencies (or perhaps gold).