The Dollar’s Bullish Breakout

The U.S. dollar bounced around like a buoy in choppy water last year.

It began the year in a strong uptrend, gaining more than 5% by the middle of May. Then in late May the Fed began broadcasting its plan to taper its monthly bond purchases. This taper talk sent the dollar lower from June through October, before it ended the year slightly down (-0.7%).

Now that the Fed is actually tapering, the dollar is on the rise. Here’s a chart of the U.S. dollar index, a measure of the dollar’s strength against a basket of foreign currencies:

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From what I can see, the dollar now appears to be on the verge of a bullish breakout. Thanks to its strength in November and December, the dollar index broke above the declining trend line (the white dotted line in the chart) that had kept it lower for most of the year. That’s a technical signal that shows dollar bulls are overtaking the bears.

Even more important is the fact that the market has fully digested the Fed’s taper plan. While the speculation phase (May to September 2013) was a drag on the dollar, the actual tapering has been supportive of the dollar.

Meanwhile, the Fed’s tapering has been devastating to emerging market currencies. Investors are fleeing non-U.S. dollar currencies at the fastest rate in years. This in turnrn works to boost the value of the dollar.

If you’re a futures trader, look to buy the U.S. dollar index with the aim of making an unleveraged gain of more than 5% (or 200%-plus on margin), as I expect the index to rise to a first target of 85.20 by mid-year.

If you’d rather play the bullish dollar via ETFs, the PowerShares DB U.S. Dollar Bull ETF (NYSE: UUP) is a great option. The equivalent target for this ETF is $23, with the current price being roughly $21.75. This too gives you the opportunity for an unleveraged gain of about 5.5% in the near term.

Regardless, expect to hear much more about the strengthening U.S. dollar in 2014.

But don’t forget… you heard it here first!