Euro-Dollar Reversal?

Since 2002, the US dollar has been on a major decline with the index falling from 120 to 75.  During this time, the Euro has risen dramatically with most other global currencies.  Notice the inverse relationship between the dollar and the euro.   

   

Over the past 2 months, a major reversal has begun.  The dollar has been on the rise while global currencies have been falling.

 

          

Much of this change in trend is due to the weakening global economic situation which will eventually prompt rate drops in many countries.  With the decline in rates around the world paired with an increase in interest rates here in the United States, this trend reversal will most likely stick.   

So how can we profit from this if we are trading in the stock market.  Calls on the UUP or puts on the FXE are possible trades if we want to play the long term reversal, but this trade will have great short term volatility that may be tough to withstand through options.  My favorite plays are with small cap stocks. 

   Why Small caps?

            1.  Generally benefit from a rising dollar.

            2.  The first to recover when the economy recovers

3.  Foreign funds will be attracted to these stocks as foreign currencies fall, thereby giving 200-500% gain potential

            4.  The attraction of foreign funds will increase the number of buyouts.

When searching for small cap stocks, the stock screener at www.finviz.com is one of the best on the web.  If not interested in trading individual stocks, the IWM and IWN tickers allow you to ride the small cap wave through an ETF.

Happy Trades,

Jeff