UUP

Everyone is loading up on PowerShares DB US Dollar Index Bullish Fund (UUP), betting on a strengthening dollar. Even Helicopter Ben can't seem to keep UUP down.

• One explanation for this rally is recent dollar intervention and changes in the U.S. International Reserve Position. The U.S. Treasury website recently reported that the Exchange Stabilization Fund sold 10 billion euros and bought dollars, a move that certainly strengthened one currency against the other. It is difficult to claim that measures like this could sustain a dollar rally—the foreign exchange market is the largest in the world, and broad measures by international banks might be curbed by inflation worries abroad. So could currency intervention be enough to cause, or sustain, a true rally in the dollar and UUP?
• Other possible causes of a reversal are the price of oil and falling demand in U.S. markets. In an interview on August 8, Marc Faber noted: “As a result of weak demand in the U.S. and lower imports, the demand for oil declined, and that led to a tightening of global liquidity, which led to the strong dollar.”
• In addition to measuring the strength of the dollar against the basket of global currencies, both UDN and UUP are collateralized with three-month U.S. Treasury bills, which provide additional income to fund investors [yield on UUP is .8%; UDN is 1.4%]. This strategy has been successful since the inception of the funds—softening the downside for whichever fund is on the wrong side of the dollar news.
• Faber cites the relative prospects for the dollar—and the prospect of future rate cuts abroad—as his reason for being long the U.S. dollar, but not long U.S. equities. “Relatively speaking, the U.S. economy is in better shape because of the weak dollar,” he said. “My view was that after four years of under- performance in the U.S. compared to Europe, the U.S. would now outperform for three to six months, and I still maintain that.” If Faber is right, the prospects for UUP could re- main positive for the rest of 2008 and the beginning of 2009.

I'm not convinced of the dollar's "strength". Technicals on UUP show an overbought RSI and negative divergence on the MACD. Fundamentally, I expect Uncle Ben to continue showering the market with cheap dollars as the economy unravels. I think there are better opportunities out there...