A Defensive Bet on King Dollar

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

As a result of last week’s market action, you were stopped out of your position in the ETFS Physical Palladium Shares (PALL). This is all “baby-out-with-the-bathwater” behavior, and has little to do with the fundamentals of stocks, bonds or equities.

Times like this are particularly treacherous, as the drops are vertigo inducing, and the rebounds are sharp. With market conditions this uncertain, it is best to stay in cash or other safe-haven assets. This week’s Global Bull Market Alert recommendation, the PowerShares DB US Dollar Index Bullish ETF (UUP), does just that with a bet on the U.S. dollar. This ETF seeks to track the price of the Deutsche Bank Long US Dollar Futures index that is designed to replicate the performance of going long in the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The investment rationale for the U.S. dollar is simple: when risk aversion soars, investors rush to the U.S. dollar as a safe haven. For all of its problems, the U.S. dollar remains the world’s favorite reserve currency because it has stability, scale and liquidity. And the current economic prospects for the United States are also the strongest when compared to Europe, Japan and the United Kingdom. In Q1 of 2010, the U.S. economy expanded at a rate of 3.9%, while Europe stagnated at 0.5% and the United Kingdom barely budged with a growth rate of 0.1%. There’s good reason to think the U.S. dollar — the “least ugly” among the world’s reserve currencies — will remain a safe haven, particularly in uncertain times.

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So, buy the PowerShares DB US Dollar Index Bullish ETF (UUP) at market today, and place your stop at $23.75.

Portfolio Update

UltraShort Euro ProShares (EUO) hit a record high of $25.25 on Wednesday, but ended the week lower as the euro recovered toward the end of the week. With the major trend against the euro still firmly down, your bet against the European currency is still a BUY.

CurrencyShares Japanese Yen Trust (FXY) rose 2.5% this past week, as the Japanese currency reasserted its role as a safe haven during times of stress. The yen still remains a place where global investors escape when markets swoon. FXY remains a defensive BUY.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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Global stocks are trading down again today, after Germany announced a ban on short selling in its stock market. The S&P 500 briefly pierced its 200-day moving average, a crucial support level in the view of many investors. A close today below that level could trigger more selling. More ominously, the MSCI Emerging Markets Index closed under its 200-day moving average for the second time in the past month. The significance of the first time was hard to gauge, as oil followed the "flash crash"

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