ETF Talk: Betting on the Buck

The U.S. dollar had been getting hammered for much of the past year, but recent debt problems in Europe are giving the greenback a lift. Fortunately, there are exchange-traded funds (ETFs) that you can buy to help you profit from the rising dollar.

It remains to be seen whether the recent upward move in the greenback will be short-lived or the start of a long-term trend. However, currency swings do have a tendency to be sustained longer than most might expect. The latest example is the big drop in the value of the U.S. dollar earlier this year. In my view, this plunge exceeded what reasonably was warranted. 

If the dollar continues to rebound, the greenback’s resurgence could offer a nice chance to profit. One of the funds that I have on my radar screen for investing in the dollar is the PowerShares DB US Dollar Index Bullish (UUP). As the following chart shows, UUP is starting to recover after taking a beating for most of 2009.

Keep in mind that the greenback often is considered a safe-haven currency. When markets are jittery and governments are in danger of defaulting on their debt obligations, the dollar generally rises. A key reason is that investors seek the protection of a currency that is backed by the full faith and credit of the U.S. government. Yes, Uncle Sam still conjures up images of strength when the rest of the world seems to be falling apart.

The Wall Street Journal wrote a scary story about the outlook for the euro in its Dec. 15 issue. It described how the euro is tumbling as debt woes spread across the euro zone. Greece, for example, appears unable to stem growing fears about its debt problems, despite government pledges of austerity and fiscal rigor. New worries about Austrian banking, after this week’s surprise nationalization of one of the country’s banks at the behest of the European Central Bank, also raised red flags about the euro. Yesterday, the euro dropped to its lowest value since October by falling to $1.4505.  

In addition, a German government budget spokesman said this week that exploding budget deficits of economically weak European countries will force his country and other financially strong nations throughout the continent to consider how to support their struggling neighbors. These so-called “PIIGS,” i.e., the countries of Portugal, Ireland, Italy, Greece and Spain, are weighed down by big budget deficits and discouraging growth prospects.

Without question, the U.S. government is running up record deficits of its own and its economy is not exhibiting robust growth either. But America still has a reputation as a country that has proven its creditworthiness. The reaction of the market during the past week or so confirms the sentiment that the dollar offers a safe harbor in the midst of a brewing financial storm.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.