The United States dollar has been in a multi year bear market, with only a couple of respites in selling over the past 8 years. Last year, the dollar rallied strongly on a "flight to safe haven trade" during the worst of the financial crisis. While this rally was very sharp, in the larger picture, it only served as a partial retracement of the bear market decline. More recently, the dollar has been under pressure since March and despite the weak economic outlook, it appears that current fiscal policy favors a weak dollar.
IN PICTURES: 7 Tools Of The Trade

As traders, we must understand that all markets are interrelated with each other, and we need to account for the implications of a trend move in the dollar. Generally speaking, the dollar and commodities are inversely related, as most commodities are priced in dollars. If the dollar falls, it takes more dollars to purchase the same physical commodity. Thus the price for that commodity rises. While at times market relationships can decouple, eventually this inverse relationship holds true. So what are some ways to play the move in the Dollar using ETF's?

The first way is through the use of an ETF that tracks the US Dollar Index. The Powershares DB US Dollar Index Bullish ETF (NYSE:UUP) is a leveraged product that can be used to trade the US Dollar. In the chart, the first thing that stands out is that the dollar has been falling for the past four months. This is evident by the declining 50-day moving average. UUP was attempting to consolidate in the $24 dollar area, but broke out of that range to the downside and failed an attempted bounce from the prior low near $23.50. With the dollar breaking down under the recent lows, it could light a fire under commodity based ETF's and stocks.

The most popular commodity that is traded against the dollar is the SPDR Gold Shares (NYSE:GLD) which tracks the spot gold market. Gold is often used as a hedge against inflation and has a solid inverse correlation with the dollar. GLD was one of the only markets to hold up in the recent bear market, and has been close to turning the corner higher. GLD has been consolidating a huge run for almost two years now, and is starting to show some signs of an attempted breakout. In looking at the recent price action, GLD pulled back from an attempted breakout in June, but has held well above the April lows. It is now turning higher after setting a higher low. If it can clear the trendline near $96, it may breakout out of the multi year base. (For further reading, see All About Inflation)





The United States Oil (NYSE:USO) ticker is another popular ETF that trades inverse to the dollar. USO is showing an intriguing chart pattern despite what appears to be a weak economy with slowing demand for oil. USO cleared a base in May and was able to rally to the $40 area. It subsequently pulled back from this level to test the May breakout area, and held above the prior base. It is starting to turn higher, and if it can clear the $40 area, it could catch a lot of traders by surprise.

The Market Vectors Agribusiness ETF (NYSE:MOO) is an ETF that tracks agriculture stocks. The chart for MOO closely resembles the chart for USO, and the same theme of an inverse correlation to the dollar applies here. MOO respected support near $31 from the May breakout on the recent pullback, and may be headed for a retest of the $38 level. If it clears level it will have bullish implications for Agriculture stocks.

Bottom Line
There are other ETF's that can be traded as dollar weakness plays as well. If the dollar weakens, then by default, currencies of other countries would strengthen. As such, trading an ETF that tracks other markets such as the iShares MSCI Emerging Markets Index (NYSE:EEM) or the iShares MSCI Brazil Index (NYSE:EWZ) would be a viable option. Regardless of which direction a traders want to take in this area, the key is to understand how markets are interrelated and how a move in one market has a ripple effect on other markets. Which side of the Dollar trade are you on?

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of www.stockcharts.com

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  7. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  8. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  10. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!