"Everybody thinks the US dollar is toast but I suspect that a sharp, if temporary rally will be with us before long," says Carl Delfeld in his Chartwell ETF Advisor. Here's his overview.
"We are nearing a point of 'maximum pessimism' regarding the US dollar and all the shorts may be heading through a very narrow exit.
"If interest rates move up or just the perception that rates may move up, the dollar should jump. Like the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts.
"A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a coordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
"Also there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran, or growing tensions between India and China.
"As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
"Many are getting nervous about the one-way bet on the direction of the US dollar and looking for a hedge. If the dollar does spike upward, just about every asset class will go the other way.
"I cannot say when such a rally in the dollar will occur, but investors might consider establishing a small position in Powershares DB Dollar Bull (NYSE: UUP), an exchange traded fund that will rise in price if the dollar rises."
