How to share in the dollar's surge

By Jim Jubak

Oil prices continue to drop. Why? It's the dollar.

Gold sells off, and commodities from copper to wheat fall in price. Why? It's the dollar.

Stock markets in Europe, Japan and Australia all retreat. Why? It's the dollar.

The dollar's recent rally has been amazing: Since July 14, when the U.S. currency traded at $1.5914 to the euro, it has climbed about 10%. That's the dollar's best price against the euro since last October. Against a trade-weighted basket of currencies, the dollar hit an 11-month high this week.

That has set off a major sell-off in everything from gold to oil to corn -- all the commodities that traders were buying earlier this year to profit from a declining dollar. And it's made the U.S. stock market the best-performing major financial market in the world since mid-July. As of Sept. 2, the Standard & Poor's 500 Index ($INX) was up 4% from July 14.

That, of course, has led to a chorus of calls from Wall Street analysts and stock market gurus to buy dollars -- by buying U.S. stocks -- and to sell commodities, foreign stocks and currencies such as the euro, yen and British pound.

Doubting the dollar

What should you do? Do you jump on the bandwagon, selling overseas stocks and anything with the whiff of commodities about it and buy U.S. stocks to profit from the resurgent dollar? Or do you use the sell-off in gold, oil and other commodities and in overseas markets to load up on those assets?

Here's my answer:

• If you're a short-term trader willing and able to time and profit from trends that last for three to six months or so, jump on the dollar rally. I think good times for the U.S. dollar could last three to four more months. The dollar could well climb an additional 10% during that period.

• If you're a longer-term investor, I think you use this rally in the dollar as a buying opportunity in overseas equities and commodity-related stocks. From this perspective, the recent rally doesn't change the long-term downward trajectory for the U.S. currency. The dollar is still in a trading range against the world's currencies marked by lower lows at the bottom and lower highs at the top. And from this perspective, oil and other commodities are still in a long-term trend that points toward higher prices.

Let me explain the logic behind that view.

The dollar right now is benefiting from one real trend and one widespread Wall Street belief.

The real trend is a perfect storm of bad news from the rest of the world. Economic growth in Europe is slowing. On Sept. 2, the Organization for Economic Cooperation and Development cut its projection for 2008 growth to 1.3%, down from the 1.7% the agency had projected in June. Japan will slow as well, to 1.2% from 1.7% in the June forecast. The British economy, forecast earlier to grow 1.2% this year, now could be slipping into a recession.

And the slowdown isn't limited to the developed economies of the world. China's economy grew by "just" 10.1% in the second quarter of 2008 -- that's the fourth consecutive quarter of lower growth (China's economy grew 11.4% in 2007).

Some economists see China's growth slowing even more. Lehman Bros. economist Mingchun Sun forecasts growth in China will slow to 8.7% in the second half of 2008 and drop to 8% in 2009. India's economic growth fell to 7.9% in the quarter that ended in June. In that quarter in 2007, the Indian economy grew 9.2%.

The widespread belief on Wall Street is that the U.S. economy, having entered its downturn before the rest of the world, is set to rebound first. That belief got a big boost from revised second-quarter numbers showing that U.S. gross domestic product had grown by at a surprisingly strong 3.3% annual rate. Economists were expecting growth of 2.7%, and government forecasts were for an even lower 1.9% growth rate.

In the days after the Aug. 28 release of the revised data, forecasts for U.S. economic growth have moved higher. The Organization for Economic Cooperation and Development, for example, raised its forecast for U.S. growth to 1.8%, up from the 1.2% forecast in June.

You can see why the combination might send the U.S. dollar climbing. If the U.S. economy is doing relatively better than the rest of the world's markets right now, and if the U.S. economy is close to a bottom and near a recovery, buying assets -- stocks and bonds -- denominated in U.S. dollars is likely to be far more profitable than investing in euro-land or Japan, or even China or India, where growth is still falling and stock prices are likely to be headed lower along with corporate earnings.

Continued: Improvements in the short run

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