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Playing it safe in the US Dollar

I continue to remain long the US dollar by holding a position in an exchange traded fund with high liquidity.  I believe this position will provide an adequate level of return with far less risk than the general stock market.

Here are a few of my reasons for favoring the US Dollar:

  1. US GDP continues to grow at 2%. While this is a sluggish pace, the economy can afford interest rates above current levels (10 yr treasury @ 2.35%).  Higher interest rates will raise the value of the US Dollar.
  2. Major global economies are continuing to devalue their currency. China’s intervention into their stock market plunge showed that their government would intercede at any cost, further devaluing the RMB.  Whether Greece remains in or out of the European Union, the country is insolvent and will require the European Central Bank to print more money.  Devaluation isn’t just limited to China & Europe, previously stable countries like Switzerland, Canada, and Australia have all recently devalued their currency.  This trend will continue and by default, the US Dollar will increase in value.
  3. Exporting countries are keeping their currency low relative to the US Dollar so that they can maintain and increase market share. Think Germany, Japan, South Korea and Taiwan to name only a few.
  4. China’s economy is slowing. The official growth rate is 7% but something closer to 5% is more realistic.  Slow growth in China depresses commodity prices thus weakening the value of commodity exporting country currencies.  This devalues money from Peru to Malaysia.
  5. Technical indicators are favoring the US Dollar. The US Dollar performed very well during the recent weeks of drama with the threat of a Greek default and a Chinese stock market meltdown.  As these threats mitigated, the US Dollar has continued to rise along with the general stock market.  It is currently at its first level of resistance above the 100 day moving average, which is a very positive display of strength.  In the below chart, I have drawn a simple step retracement progression showing likely resistance level at points A, B, C & D.  I’ll be watching the performance of the US Dollar at these levels of resistance to determine how long I will hold my position.US $ rises above 100dma 150718


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