Make Your Profit In The Euro Selloff

| September 14, 2011

Right now the mainstream news media is focused on Europe.  The EuroZone is finally seeing what the markets think about the true value of their currency.  And for the very first time in months, the Euro is starting to collapse…

Radical change is in the wind.

The Euro has been primed for a selloff for quite some time.  It’s been in the cards.  European banks are unstable, Greece is once again defaulting, and the tension between the spenders and savers in Europe threaten to blow apart the Euro.  But despite all the negative forces impacting the Euro, it’s been holding up.

Why?

Simply put, the Euro has been treated like a protected species.  It didn’t matter if news of default or debt contagion hit the wires… the Euro somehow stayed above $1.40.

But finally that’s changed…

The Euro has traded as low as $1.3493 in the past few days.  And the bleeding is far from over.  If the selloff continues at this pace, we could see the Euro down near $1.2500 in no time.

As you know, the Euro trades against other currencies, not in a vacuum. When the Euro falls, its counter currencies rise, and vice versa.  The Euro and US Dollar have always shared an inverse, back and forth trading relationship.  And over the past couple of years, the US Dollar has seen major losses… all while the Euro soared.

And that’s why the US Dollar will rally on the Euro fall.

But there’s more to it…

In addition to the EuroZone mess, we also have to consider the Yen.  The Yen is the new safe haven powerhouse currency in the world.  In fact, the Yen is nearing its strongest levels in roughly a decade.

This is certainly bad news for Japan…

The Japanese can’t afford to see their fragile, recovering economy pressured by a strong currency right now.  While a strong currency sounds good, it puts Japanese exporters at a huge trade disadvantage.  The strong Yen forces them to raise prices on products sold overseas, making them less competitive.

So what can Japan do about it?

That’s easy… play the intervention card.

In fact, Japan’s finance minister has already announced to the world Japan is ready to take “bold action” to protect the Yen from further appreciation.  This can mean only one thing… intervention!

Here’s where this gets interesting…

If Japan intervenes, they’ll sell off the Yen a bit to bring the value down. They might even copy the Swiss government and peg or fix the Yen to another currency (such as the Euro or US Dollar).  Of course, a peg isn’t likely.  It would be too big a step for the freely traded Yen.

The upshot is the Yen is poised to fall in value.

Of course, if the Yen does fall, we should see the Dollar rise in value.

So let’s step back a moment.  The Euro is falling which is good for the US Dollar and the Yen is gearing up to be pushed lower… which is also good for the US Dollar.

Looks to me like the US Dollar should rally for some time.  If you think we’ve missed the boat on this trade, think again.  Nothing could be further from the truth.

As you can see, even after its recent breakout, the US Dollar is still down over 12%.  And the Euro is just starting to crack… after an impressive peak gain of 22%.

Even the Yen is still up over 17%.  As you can see, the US Dollar can rally for quite a while.

So how do you capitalize on the US Dollar’s rise in the next few months?

The easiest way to get in on the action is to buy a bullish US Dollar tracking ETF.  And the most liquid one on the market is the POWERSHARES DB US DOLLAR INDEX BULLISH FUND (UUP).

Consider adding UUP to your portfolio to capture solid profits on the US Dollar.

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Category: Currency Trading

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