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King Dollar: Vardy's View
10/23/2014 9:00 am EST
While the market has been tough for investors, there is one asset class that has rallied hard; the US dollar has been in a monster rally, reports Nicholas Vardy, editor The Alpha Investor Letter.
The US dollar has been the Rodney Dangerfield of currencies for as long as I can remember. It never gets any respect.
Trashing the US dollar is the favorite pastime of a whole cadre of gloom-and-doom investors, as well as best-selling authors and academics. A weak dollar long has been a metaphor for the United States’ decline.
Soaring US deficits, a slow economic recovery, and threats from rising economic superpowers like Brazil, Russia, India, and China (the BRICs) even have led to calls for replacing the US dollar as the world’s reserve currency.
So, what accounts for the US dollar’s recent parabolic rally? The answer is as straightforward as it is, perhaps, surprising: The dollar is rallying thanks to good news about the US economy.
Surveys confirm that most Americans feel like their country is still in recession. But compared with other developed global economies, as well as emerging markets, the United States isn’t in such bad shape after all.
There is another reason why the US dollar is rallying: the global perception that the US economy is the best of a bad bunch. Put another way, what other currencies besides the US dollar are you going to put your money into?
Let’s look at the alternatives. Major EuroZone economies like France are in or on the brink of recession. Germany, is slowing. The Japanese currency hasn’t traded this low against the US dollar since 2007. And the BRICs are fraying at the edges.
The US dollar remains the ultimate safe haven asset. So think of betting on the dollar as a hedge against all of your other risky assets.
If the current pullback is indeed the start of a sustained correction, the flight to the US dollar will certainly continue.
But even if it is just a short-term hiccup, there are still other solid reasons—that is, the relative strength of the US economy compared to its rivals—to expect the “King Dollar” rally to continue.
So, on balance, this is a good time to be bullish on the greenback. And the best way to profit from that rally is through a bet on the US Dollar Index through the PowerShares DB US Dollar Bullish ETF (UUP).
While a short-term correction in the dollar seems likely, the relatively strong fundamentals are in place. It’s hard to see how the dollar can resist going higher.
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