A Contrarian Bet on the Greenback

10/22/2009 1:00 pm EST

Focus: ETFS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, says sooner or later the US dollar will rebound, and he says one ETF could be a hedge against that and weaker markets.

I suspect that the [recent] lack of confidence in the US dollar has a lot to do with the lack of confidence the world has in our current political leadership. In fact, it doesn't surprise me at all that since the new presidential administration embarked on its stimulus spending path, the value of the US dollar has taken a virtual nosedive.

The US Dollar index, a measure of the value of the greenback versus rival foreign currencies, is well below both its long-term, 200-day moving average [and] the short-term, 50-day moving average.

But despite the greenback's recent woes, I still think the future looks bright for the dollar. Despite the ugly headlines and rumors, the dollar still is the go-to currency when it comes to safety, liquidity, and sheer volume. When push comes to shove, the dollar still is the currency that you want to have in times of crisis. So, my advice is to hold off on writing the buck's obituary just yet.

The value of the US dollar has been hammered in recent months, and observers—me included—feel that the greenback's decline is bound to run out of steam sooner rather than later. When this happens, investors will have a chance to profit by riding the US dollar higher.

One fund that lets investors bet on the recovery of the US dollar is the PowerShares DB US Dollar Index Bullish (NYSEArca: UUP). Investors also may view UUP as a hedge against a falling stock market and a slowdown in the economy. UUP is an exchange traded fund (ETF) that gains in value as the value of the US dollar climbs and rival foreign currencies fall.

For those who may be eyeing an investment in the dollar, UUP could be a good way to hedge against what I suspect will be asset deflation in equities and a decline in prices stemming from a declining economy.

However, such an investment should involve only a small portion of your assets. You also will want to put a stop loss on this position, if you choose to buy it. In addition, only risk the amount that you are prepared to lose, since a bet on the US dollar right now is a gamble that the current downward trend of the greenback will reverse.

I cannot stress enough that a hedge position such as this mostly serves as insurance in the event the market comes down and the economy continues faltering. If the idea of hedging seems a bit of a stretch to you, you're probably better off avoiding such investments.

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