How to Stop the Dollar's Slide
CHICAGO (
) -- All eyes are on the dollar right now.
The U.S. Dollar Index has continued to slide. Since reaching a high of 7900 on Sept. 4, it has tumbled over the past several sessions and is currently trading at 7663.
The weak greenback is undoubtedly one of the biggest contributors to the current run in commodity prices. We are also seeing some continued improvement in the economic data on a weekly basis. In addition,
Fed
Chairman Ben Bernanke's comments on Tuesday about the recession "likely being over" and a Consumer Price Index showing inflation in check are driving investor hunger for risk.
As a result, investors are purchasing higher-yielding currencies at the dollar's expense. I do not believe that the dollar will continue to slide indefinitely. Although the long-term outlook does not look positive, I am looking for a decent "bounce" in the near term or at the very least a slowdown in the selling.
With our government continuing to print money, one wonders what the catalyst could possibly be for the dollar stabilizing or even rallying from this level.
Here are a few possibilities. Although it seems unlikely at this point, the illusive pullback in the markets could trigger some flight-to-safety buying. Once again, at the very least I feel a pullback in global equities of 5% to 10% would slow the rate of investors deserting the dollar.
The growing difference between short-term vs. long-term borrowing costs in the U.S. may entice some buyers back into dollars.
The US Dollar Index is approaching long-term support at the 76 level. I feel this may hold, and if not, I think it will least slow the bleeding.
There is also the effect policymakers can have on the dollar. It is amazing to see the impact the Fed chairman's words can have on the dollar. Although the Fed is standing pat on interest rates, any indication of changes in the Fed's exit strategy could have a huge effect.
Now I want to be clear that the trades I am looking at are short-term trades. It is my belief that the dollar will bounce, and possibly bounce quite a bit higher because of any one of the above factors. If we do see a bounce, short-covering will more than likely throw fuel on the fire. I will then look at selling opportunities.
The euro is one currency that the dollar may be able to hold its own. Looking at Euribor futures, it appears that the European Central Bank will not be raising target rate until the final quarter of 2010. According to Fed Fund futures at the
Chicago Board of Trade,
traders are pricing in an almost 59% chance that the Fed will raise its target rate by the second quarter. This differential may be enough to hold the euro off, at least for a short while.
Due to this and other economic factors, I am considering selling some call premiums in the euro currency. The December euro futures appear to be running into heavy resistance around the $1.4720 level. This may present a good opportunity to sell calls. I am looking at selling October call spreads that track the December futures contract.
With the euro trading around $1.4714 I like the idea of selling the October 150/155 call spread. I am looking to sell this spread for a minimum of 50 ticks or $625.00. The spread has a maximum loss potential of $5,625 if sold at 50 ticks. The options have 23 days until expiration.
Within this time frame, the theta, or time decay of the options, will be quite rapid. A good down day or two will suck a lot of value from the spread. I will look to exit the spread if the euro crosses $1.4950.
Again I remind investors that past performance is not indicative of future results. The risk of loss in trading futures and options is substantial and such investing is not suitable for all investors. An investor could lose more than his initial investment.
Matt Zeman is a principal with Lasalle Futures Group and chief market strategist for Time Means Money.Com.
