The mad dash to all things safe has taken over the stock market as well as the world of currencies. In the stock market, the safety sectors are the utilities and consumer staples. When it comes to currencies, the choice has been the U.S. Dollar.
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The PowerShares DB US Dollar Index Bullish ETF (UUP) is trading at its near the 52-week high after a rally of over 5% in the month of May. The rise in the greenback has coincided with the drop in the euro versus the U.S. Dollar. The euro has broken below the $1.24 level for the first time in two years and the Rydex CurrencyShares euro ETF (FXE) fell all but two days during the month of May.
The recent ascent of the U.S. Dollar has a lot to do with the safety of the currency as well as the rebound in the U.S. economy in the last two years. However, there is also the argument that the only reason the greenback is doing so well is because it is viewed as the best of the worst. The european Union (EU) has well documented issues at this time and foreign central banks have stepped in to keep a lid on currencies of other nations. The de facto winner is the U.S. Dollar.
By investing in UUP, investors will be tracking the U.S. Dollar Index, which is an index that is intended to replicate the performance of being long the greenback versus a basket of foreign currencies that includes the euro, Japanese Yen, British Pound, Swedish Krona and Swiss Franc. The index uses futures contracts to achieve this strategy.
SEE: Building An All-ETF Portfolio
The Greece financial troubles that have now spread to Spain, Italy, and others have put the fear level in the EU at troubling levels. Not only are investors selling shares of any related stocks, the euro has also been a victim of the mass exodus out of EU related investments.
The shares of FXE have broken all major support and the next stop for the ETF could be the low of 2010 at $118.79. Until a resolution in the Greece situation is found and the future of Spain in the EU is certain, it appears the trend of lower euro prices will continue. Keep in mind that the currency is extremely oversold and that a bounce at some time in June is likely, as shorts will be forced to cover on any positive news out of the region.
The Other Currencies
For years the Japanese Yen and Swiss Franc were considered the safety currencies for investors around the globe. During 2008 when the S&P 500 fell by 38% the Rydex CurrencyShares Japanese Yen ETF (FXY) and Rydex CurrencyShares Swiss Franc ETF (FXF) rose by roughly 17% and 2%, respectively. Intervention by the Bank of Japan and the Swiss Central Bank to keep their currencies from rising too quickly has artificially kept the ETFs from continuing their uptrends. All investors should realize it is not the best strategy to fight the Fed or any other central bank around the globe.
SEE: What Are Central Banks?
The Bottom Line
In the short-term, a fall in the value of the U.S. Dollar could be likely due to such a dramatic rally in a short time frame. However, in the intermediate-term the greenback appears to be positioned well heading into the end of the year. Unless a dramatic move is made by the EU or its peers to stabilize the debt crisis, the trend should remain higher for UUP.
The future of the euro is not dependent on whether Greece stays in the EU. The euro will depend more on Spain and its ability to shore up its economy and debt issues. If the outcome is positive for Spain, the euro will likely rebound with the global equities market.
One thing is certain, the next six months will have many rallies and sell-offs for investors to buy and sell into.
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.