There's been a trend emerging in the U.S. dollar (USD) for the past few weeks that makes little sense. At a time when the dollar should be gaining momentum, its value has been drained quicker than a keg of cheap beer at a frat party.
According to several sources, the recent drop can be at least partially attributed to technical and algorithmic trading.
When you strip out the commotion and look only at the real data, though, it seems there could be a fair amount of upside in the USD over the next few months. But before I tell you about how to profit from this situation, let's break down the basics of my thesis...
The U.S. dollar can have dramatic effects on basically everything in our economy, including the value of other assets. On the flip side, economic and fiscal pressures can also affect the USD's value.
Sometimes, these complex relationships can trigger a "chicken or the egg" paradox that confuses investors and throws the USD's cause-and-effect balance off kilter.
A rising dollar is typically a sign of an improving economy. As increasingly positive economic data is released, the value of the dollar typically rises in response.
Two things basically control the value of the U.S. dollar:
1. The real strength of the U.S. economy (GDP, employment, etc.) 2. The Federal Open Market Committee's fiscal policies (value of USD increases when the Fed raises interest rates and falls if rates turn lower)
I discussed this relationship with my Profit Amplifier premium subscribers back in December and used it to book a 19% gain in just three weeks (more on how shortly) as a binary play on whether the Fed would decide to raise rates.
Those same factors play a role in today's trade. In fact, Federal Reserve Chair Janet Yellen gave a speech in Jackson Hole, Wyoming on Friday, giving strong indications that the central bank will likely raise short-term interest rates at least once before the end of the year.
The truth is, while our economy might not be breaking any records for growth, economic data has been improving, and the unemployment rate remains low after several strong labor reports. GDP is also expected to take a turn for the better in the back half of the year, and consumer sentiment remains strong.
These are all bullish for the U.S. dollar. Yet the USD's is 1.6% off its mid-July highs.
In a recent interview, Stanley Fischer, the vice chair of the Federal Reserve, said the economy is close enough to all of the Fed's targets to warrant a hike. The minutes from the FOMC's most recent meeting also showed a Fed that sees economic progress -- a Fed prepared to hike rates this year -- but traders don't seem to buy it.
The CME's Fed Watch Tool still shows a more than 50% chance of a hike, with some pros even betting on an increase of more than 25 basis points. The probability of a rate hike has been rising steadily and sharply since June, but none of that has been reflected in the value of the dollar.
New York Fed Chief William Dudley even said that the market is "complacent" regarding the Fed's likelihood to raise rates. This kind of outright statement is atypical for a Fed member and quite hawkish (in favor of a rate increase), from my perspective.
Again, this should be bullish for the dollar.
But, even though both the data and the Fed's sentiments have been increasingly hawkish, the USD has been struggling. This is likely due to temporary bearish momentum -- driven by computers rather than a real dollar/economic demise -- and investors' unwillingness to accept the notion that a rate hike could occur this year.
Because a large number of traders still don't believe a hike will come this year, there's an immense amount of investment dollars not committed to the USD... yet. And that could be a big catalyst.
My preferred way to trade the USD is with the PowerShares US Dollar Bullish Index (NYSE: UUP) to trade the USD. This fund tracks the value of the U.S. dollar versus six other major currencies, with more than 92% of its value being derived against the euro, Japanese yen, Canadian dollar and the British pound.
When the value of the dollar (relative to these other currencies) increases, so does UUP's price.
While you could purchase shares outright for a bullish play, I perfer another strategy that amplifies small moves in the ETF into double-digit gains.
Just last week, I recommended a trade in my premium Profit Amplifier service that turned a 1% move in UUP into a 17% profit in just 4 days. In the past year and a half, I've used the same strategy three times to book profits ranging from 11% to 22% in a matter of weeks from much smaller moves in UUP.
If you want to learn how we're able to consistently book double-digit gains in a matter of days or weeks like I've described above,
