The U.S. Dollar and Other Extremes

By Lawrence G. McMillan

When the U.S Dollar moves, it often affects the price of many other things, especially commodities.  Of course, other currencies move in the opposite direction to the dollar, since we – as U.S. citizens – tend to view everything in dollar terms.  

In this article, we’re going to look at some of the extremes that have been created by the extremely lengthy dollar rally that is taking place currently.  The dollar began to rally at about the first of July last year (even earlier, by some measures).  The rally has been gathering steam of late, and now it’s like a runaway locomotive.  Not surprisingly, one feature of this extended rally is that almost everyone is bullish on the dollar; in fact, commentators on TV laugh at the thought of shorting the dollar (or buying the Yen or the Euro).  When one hears that kind of uniformity of opinion, he should pay attention.  Obviously, it’s hard to quantify a few reporters’ actions as indicative of an extreme opinion.

The ways that one has of trading the dollar are not all that well known.  There are two companion ETF’s – the U.S. Dollar Index Bull ETF (symbol: UUP) and its inverse, the U.S. Dollar Index Bear ETF (symbol: UDN).   There are options traded on both, but only the UUP is liquid – averaging about 25,000 contracts per day.  In fact, UDN seems to be somewhat superfluous, as the majority of the volume in both the ETF and the options is in UUP.

Another product is the U.S. Dollar Index futures (base symbol: DX) that are fairly liquid as well, averaging about 50,000 contracts a day in the last couple of weeks.  Options trade on those as well, but they are very illiquid...

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