Here's How a Stronger Dollar Should Be Changing Your Investment Strategy

 

NEW YORK (TheStreet) -- There are a couple of ways to profit from the strengthening dollar, one of which is to simply buy it. Active investors looking for such exposure might consider the PowerShares DB US Dollar Bullish ETF (UUP) .

The European Union's move to lower rates last week and further easing in Japan have caused the dollar to break out of its multiyear downtrend. As you can see below, there is a strong technical setup for continued dollar strength (as shorter-term moving averages eclipse the longer-term) in a positive fashion:

UUP Chart

UUP data by YCharts

What changed? Well, since the beginning of the year both Europe and Japan have been losing their respective fights against deflation. Japan seems to have been deflating long enough to turn itself inside out. Nevertheless, the central banks for both regions have launched efforts to devalue their currencies (against the dollar). Why do this? There is no quicker way to make one's goods more attractive to the largest consuming nation, which also happens to use dollars.

Just six months ago we pointed out that the dollar looked to be weakening further and recommended buying commodities, via the PowerShares DB Commodity Tracking ETF (DBC) -- priced in dollars -- as a result. It looks like it may be time to concede defeat and fold our hand on this one, especially in taxable accounts in which the blow will be softened by a tax loss.

So whom does a stronger dollar help? And whom does it hurt?

Let's start with oil, since it's probably the most widely used commodity. Since commodities are denominated in dollars, a stronger greenback will tend to force prices down.

UUP Chart

UUP data by YCharts

Here are some others who benefit from a stronger dollar:

  • The U.S. consumer, who has more purchasing power with a stronger greenback.
  • U.S. Treasuries, because foreign investors searching for yield will buy them.
  • Airlines, because of lower oil prices: Delta Air Lines (DAL) Southwest Airlines (LUV) , United Continental (UAL) .
  • International and emerging-market stocks: Vanguard FTSE Europe ETF (VGK) ; Vanguard FTSE All-World ex-US ETF (VEU) ; iShares China Large-Cap (FXI) ; iShares Latin America 40 (ILF) , iShares MSCI Emerging Markets (EEM) .

And those who might be hurt:

  • U.S. large-cap stocks, because big companies will be less competitive overseas. So consider further profit-taking in positions such as the Vanguard Total Stock Index (VTI) , iShares Russell 1000 Value (IWD) and iShares Russell 1000 Growth (IWF) here.
  • Big, domestic oil producers: ConocoPhillips (COP) ; Chevron (CVX) ; and ExxonMobil (XOM) .
  • Russia: Market Vectors Russia ETF, (RSX) . It costs Russia something like $80 to get a barrel of oil -- the country's single largest export -- out of the ground. Oil and gas exports make up 40% of Russia's GDP. As the price drops globally, so does Russia's chances of turning around its already floundering economy. And that's not even taking into account current and future economic sanctions.

At the time of publication, the author's firm held DBC, EEM, ILF, UUP, VGK and TLT in client accounts.

Follow @ArgyleCapital

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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