Currency ETFs: Long Yen and Long Dollar in the Credit Crisis

The U.S. market drops 800 points. It recovers more than half to finish down 370 points. Was that capitulation? Hedge fund manipulation? Yet another relief rally?

Nobody knows. About the only thing that we do know is that... up or down, good or bad... the price volatility can't last.

The CBOE Volatility Index (VIX) obliterated previous highs on Monday, October 5. This popular measure of fear normally travels between 12 and 29. More recently it has spent weeks in the 40s. Now it's at 55?

The erratic price swings simply have little precedent. And yet, the S&P 500 is only 32.5% off its highs nearly 12 months ago. That's not atypical at all. In fact, 30% and 13 months is considered average for bear markets.

Does this bode well for a post-election run-up? Only if you hear the sound of credit uncrunching. And if that happens, be sure to consider ETFs for McCain/ETFs for Obama.

Perusing 300+ stock ETFs, you won't find a single one that is above its 200-day moving average. Not a one. At this moment, the entire asset class is down for the count.

Commodity ETFs... same dillio. There is no glut of supply, so it's got to be the disappearance of demand, right?

Well, there's one other explanation. Compared to most of the world's currencies, the U.S. dollar's strength has caused dollar-denominated commodity prices to slide. We've also seen commodity rich countries like Russia and Brazil fall the hardest and the furthest from the top. (Both have actually halted trading on their exchanges.)

So what's up with the dollar? Why is the world buying it when the U.S. economy is clearly fighting off a recession?

They're buying the U.S. dollar and they are buying the Japanese yen because the currencies of the largest 2 economies are perceived to be safer than that of every other country. As bad as we've got it... they may have it that much worse!

Since there's little worth buying in the stock ETF world in the precarious present, it pays to look at a few currency ETFs. The Currency Shares Japanese Yen (FXY) is up roughly 8%. Technically speaking, it's also in a long-term uptrend. (Japan is facing its own recessionary pressures, but the currency is attracting buyers in the credit crisis.)

Perhaps more stunning has been the resurgence of the U.S. dollar. The U.S. government literally has to print money from nothing, yet the world is choosing it just the same.

The PowerShares US Dollar Bullish Fund (UUP) is only up about 5%. Yet it has moved 12% higher over the last 12 weeks. What's more, it's more than a mere blip above the long-term 200-day trendline.

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