Currency Options Can Help Profit From the US Dollar

Two years ago I was sitting in the San Francisco airport.  I was about to start an extended road show with a client of mine.  We’d be raising close to $ 50 million.  We had meetings all over the US, Canada, and in Europe. We’d be on the road a little more than 2 weeks, and this was crunch time.

As always I started thinking ahead.  Making sure flights were arranged, hotels booked, car services notified, clients contacted, accounts set up, documents delivered.  The details were important . . . sometimes a little detail meant the difference between a good meeting and a great meeting.

Then I started thinking about London.

I’d need 4 different currencies on this trip, maybe five.  US Dollars for our leg through New York and Boston.  Canadian Dollars for expenses in Vancouver and Toronto.  British Pounds for London.  Euros for Paris.  And if everything went well . . . we’d have two meetings in Switzerland which would require Swiss Francs.

Later that week I landed in London Heathrow airport.  The first thing I did was take my US Dollars to an exchange window where I gathered all the other currencies I’d need.

  Exchanges like this are common in the global currency markets.  More than $ 2 trillion dollars are exchanged every day.  To put it in perspective, that’s more business than all of the stock markets in the world combined.  Transactions like these happen all over the world millions of times every day.  Some are big and some are small, but all of them follow along using ever-changing exchange rates.

The US Dollar is the closest thing we have to a global currency.  We have the largest economy in the world, and our greenbacks are floating the world over.  Our currency’s so popular many countries fix their exchange rates with ours.

In March, it was a dire time for the US Dollar.  The dollar had been falling for several years straight.  Every tick down caused the demand for commodities to go up.  I don’t have room to explain why, but trust me. As the dollar’s value fell, the world pushed more of their investments into commodities.

Oil prices were at record levels.

US consumers were paying more than $ 3.50 for a gallon of gas, and it was only going to get worse.  Prices were going up and up, and inflation was taking hold.  It couldn’t be happening at a worse time.  The collapse of the US housing market was dragging down financial institutions and banks.  The economy was on the verge of a major implosion.

Then Bear Stearns went insolvent.

The firm was quickly married off to JP Morgan, averting certain disaster. That move alone saved the US markets from meltdown.  But the damage was done.  The bad news pushed the US Dollar lower.  Every tick down in the US Dollar seemed to drive oil prices higher.  Higher oil drove inflation fears.  And with the economy stagnant . . . we risked a return of stagflation.

In May, it looked like we’d hit bottom on the dollar.  Horrible news out of the economy included surging commodity prices and falling consumer confidence.  Yet the dollar held its ground . . . a change few observed. We had hit a bottom.

Global issues started getting front page press.

In mid-summer, some of the minor currencies started struggling.  The Bank of Vietnam devalued their currency – the “Dong” – by 2%.  They also raised interest rates to 14% in an effort to curb inflation.  In the last year, Vietnam had seen prices rise more than 25% – and you thought it was bad here in the US.

Then came news from India.

The Central Bank of India started battling inflation which was out of control.  They recently increased interest rates over 8% in an effort to slow inflation.

In June, the US Dollar started strengthening.

The Federal Reserve met and held interest rates steady.  This was the first time in 9 months that they left rates unchanged.  However, they continued their tough talk on inflation.  They noted food and fuel prices were driving inflation concerns here in the US.

So enough economic news . . . what’s this mean?

I learned two important things.  First, by holding rates stable the Fed indicated the economy was still growing.  It also meant the liquidity actions were helping ease the credit crunch.  The other key point was inflation is a key issue.

This was a good news / bad news event.

Good news for the US Dollar as the natural antidote to inflation is rate increases.  Bad news for consumers as we’ll have to see a strong and continued thrust of inflation before the Fed will act.  With the Fed now focused on inflation and the economy still shaky but stablizing, the US Dollar started a rally.

Over the last two weeks we’ve seen a rally of more than 10% in the US Dollar . . . something that I’m expecting to continue though the end of the year.