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Currently $US is plumbing the lows of the up-trending channel it has carved out for itself over the past 3 years. vs. a basket of currencies (the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc) tracked by the Deutsche Bank Long US Dollar Futures Index. Cycles have been getting progressively shorter, so it looks like the next leg up should take three to six months, in which time the $US should appreciate as much as 20%.

Also pointing to the imminent rise in the dollar are the contrarian indicators such as renewed inflationary expectations by the public, which is watching their purchasing power shrink at the grocery store, their health care bills skyrocket (my health insurance premium just shot up by almost exactly one third) and gold prices making new highs all the while the Fed is busy oiling the printing press. The scared public intuitively extrapolates this to expect more and widespread inflation around the corner.

What the US public is missing is that the rest of the world is in no better shape than the US and Central Banks world over are attempting to facilitate growth of exports through local currency weakness. Of course, when everyone prints at the same rate, the net effect on currency exchange rates is zero. Of special concern overseas is, of course, the Japanese Yen, which while making 15 year highs against the dollar, has had it's caretakers, the Japanese Government, unsuccessfully pursuing inflationary policies for two decades.

Speaking of printing, QE2, which may be announced this week, after the next Fed Open Committee meeting will likely be smaller than is generally expected. Not that the expanding money supply is not scary or even perhaps the wrong thing to do, but Fed buying treasuries to take down interest rates further down the yield curve is not the stuff that inflation is made of. In any case, it will almost certainly not have the effect of taking the dollar down vs. other currencies.

Another issue is this week's US midterm elections. Markets generally rally after them, no matter who wins. A rally in the stock market would bode poorly for the dollar, which has been a safe haven store of value in especially turbulent moments of the past couple of years, but has done poorly whenever markets rallied. My take is that the much expected post elections rally will fizzle out before it ever gets started. With no good economic news on the horizon, Santa Clause will also have a hard time getting out the rally and the markets will end the year on a sour note.

I found my arguments convincing enough to take out a position last Thursday in UUP, PowerShares DB US Dollar Index Bullish ETN, which tracks the dollar index reasonably well over short enough periods of time and with low enough expenses. I got in at $22.40. The plan right now is to get out of Dodge at $25 in Q1 2011.

A bag of US dollars

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Are you currently bullish or bearish on the economy and the stock market?:

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