How to Profit from the Latest Dollar Rally Without Buying the Dollar

Good Day Currency Traders,

Sometimes predicting financial markets is a piece of cake.

Entire markets stretch out before you like a level playing field and anyone who's even the least bit market savvy can see where stocks, bonds and currencies are headed.

In those types of blessed markets, one plus one really equals two. A higher dollar equals lower commodity prices. A stronger U.S. dollar equals higher stock market prices all over the world.

Sometimes it's just that easy. Other times, it's not.

Take the current dollar rally. There are a myriad of "hidden" threats lurking that could derail its advance. The problem is there is money to be made on the strengthening greenback and investors realize it.

For example, an agitated client at our asset management firm just emailed me about the dollar. In his email, he demanded that I take advantage of this dollar rally. Of course, he could be right - assuming the rally lasts. Trouble is, no one knows if that's going to happen.

Right now, it's hard to say. You can't easily shrug off the long queues of angry people in front of collapsed banks or the protracted global recession. All those factors weigh on the dollar.

So beware of the notorious bear market rallies - including currencies.


After Nine Months, Has This Global Stock Bear Given Birth to a Higher Dollar?

Nine months of fierce bear market have pushed many stocks around the world down to attractive valuation levels again.

A firmer U.S. dollar could trigger an impressive bear market rally. In particular, we could see a rebound in financial stocks and shares of European exporters tied to the higher dollar going forward.

That leaves us to answer the crunch question: Where is the U.S. dollar heading?

From a technical point of view a spike in the U.S. dollar would not be a surprise. Since 2000/2001, the U.S. dollar/euro (USD/EUR) exchange rate has fallen 45%. This means the dollar fell an average of 8% each year.

The downtrend was only briefly interrupted by a 10% dollar rally in 2005. In other words, there wasn't a noteworthy correction for 2 ½ years - that is suspicious. This doesn't happen too often to exchange rates (at least going back as far as 1973).

The best argument for a temporarily firmer U.S. dollar is the prospect of a weaker euro. There's no longer any question of whether Europe can elude the U.S. recession.

Now the question is: How long and deep will this contraction be in Europe?


Trouble in the Eurozone Paradise

The news coming out of Europe has been darkening by the day.

Consumer sentiment in the main Eurozone nations has plunged - especially in Italy and Spain with never-before-seen numbers. Eurolands' service sector is stagnating. Sentiment among businesses in the German export machine is in a freefall. Growth in new orders has come to a halt.

In other words, it's just a matter of time until the European Central Bank (ECB) loses her anxiety about inflationary pressure and stops talking about hiking rates. This should shed a new light on the U.S. currency.

So yes, the dollar may be heading higher. But here's the thing: My preferred way of drawing profit from a continued rally is not buying U.S. dollar but rather, I'm buying the few currencies and stocks that will profit from this rally.

Profit from this Rally, Without Sticking Your Hand in the Fire

It looks like it's time for a portfolio shift. As always, I and my colleagues consider protecting your assets as a top priority in an environment of high uncertainty.

But you cannot help but have a second look at this bunch of stocks in Switzerland, the Eurozone, U.K. and even in Japan that currently trade at fire-sale prices (with a recession already priced in). All of these should do well once the U.S. dollar moves higher versus the major currencies.

How can you benefit from the current U.S. dollar strength? Our recipe is quite simple. For our clients, my colleagues and I are planning to buy Japanese yen and invest in a dozen carefully selected stocks.

Of course, it's impossible to know whether we get away from this recession and banking confusion with only a black eye or if we'll end up in a depression before this mess is through. (If it's the latter, 40% of stock values could disappear.)

Therefore a good deal of our company's portfolio will be allocated to short-term investment strategies. For instance, we're looking at top-rated short-term bonds in the euro, Swiss franc and a few selected high-yielding currencies such as the New Zealand dollar (NZD).

Bottom line: The U.S. has deeply rooted problems at the moment. The U.S. is facing high debt, a zero % savings rate and depleted balance sheets. I simply don't believe all that jazz will be whisked away overnight.

So my colleagues and I would rather invest in the currencies and stocks that will profit from any short-term dollar strength than the dollar itself.