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What Goes Up May Come Down for the Dollar

It was a good run.

Since the end of World War II, the world’s most respected currency was the U.S. dollar (USD). If someone wanted to peg their currency value to keep their economy stable, they pegged it to the dollar. Commodities like gasoline were paid for in dollars. A nation’s financial health could be measured by how many U.S. dollars they had in their values. Even countries that didn’t particularly care for the United States were big fans of the dollar.

It looks as if that run may be over…

Leading economists think that the dollar could fall by as much as 35% against our biggest trading partners’ currency. Fiat currencies like the U.S. dollar are only as good as the faith other nations have in its value. And right now, faith in the American economy is fading fast.

Our response to the coronavirus pandemic has been laughable to the rest of the world. Virtually every level of government has failed to act reasonably. We were unprepared for something the medical community has been telling us was inevitable in a globalized economy.

As a result, the economy is in shambles. Without the intervention of the Fed, we would have seen a collapse in debt and equity markets that would have rivaled the depression of the 1930s. We have held that off by selling the Fed’s balance sheet to over $7.2 trillion and now the government is over $25 trillion in debt.

Since the pandemic began, more than 49 million Americans have applied for unemployment. There are more than 20 million people who remain unemployed, despite many states’ attempts to reopen the economy.

How long the juggling act can continue is anybody’s guess. We have never tried government intervention into the economy at this level before, so anyone who says they know how it ends is either confused or lying.

Thousands of businesses have closed their doors for good around the United States.

On top of the economic mess, we have civil unrest in the streets that we have not seen since the late 1960s. How much faith should our trading partners have in our currency when they see riots in the streets and monuments of the founding fathers being torn down? They’re maybe used to seeing this during revolts in a third world nation, but not on the streets of the strongest and once most respected nation on earth.

We can debate blame and causes of everything that is going on in the U.S. economy and in the streets of our cities, some other place and time. Here it is our job to look at the realities in front of us and figure out how to make money as events unfold.

As other nations lose faith in the value of the dollar, the collapse in value could be swift. This isn’t a “maybe someday” event…  nor is it something that will play out in the next months or years. This is happening right now.

How to Play a Dollar Decline

Currencies move like large ships. Once they pick a direction, they will move in that direction for a long time. Slowing it down and turning the ship around is a very slow process. If we see a dramatic drop in the dollar, that will be the beginning. After the initial decline, the dollar could trend lower for a very long time.

What we want to do here is buy Invesco DB U.S. Dollar Index Bearish Fund (UDN). This is an Exchange Traded Fund (ETF) that tracks the U.S. dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

If the dollar is gaining against the index, UDN will fall in value. This has been the case since 2011 as the dollar has been the most respected fiat currency in the world.

If the dollar is going down, the UDN will rise in value. That’s what we expect to happen if the rest of the world continues to lose faith in the United States economy.

The long play is to buy UDN for $21 or less, hang on, and watch your profits pile up as the world turns its back on the dollar.

For a shorter-term trade, we want to buy UDN $21 calls for $.40 or better.

The trade is simple, UDN moves up if the dollar goes down.

If the bearish economists are right, a 35% decline in the dollar will send the UDN as high as $27. 

Your call options would then be worth 15x the current price for a massive short-term win.