The Trade To Make On A Volatile U.S. Dollar

We’ve finally reached the beginning of 2021, and I don’t think anyone is complaining about leaving last year in the dust. After all, the coronavirus pandemic wreaked havoc across the globe and made life miserable for a vast majority of the world’s population. Let’s all hope that 2021 is going to be a much happier year.

For most investors, 2020 likely wasn’t too bad. The market crashed in March, but climbed back to new highs by the end of the year. Moreover, the investment community saw a massive influx of new investors, as many people were stuck at home with nothing better to do but play the market. (Having commissions on trades virtually disappear didn’t hurt either).

One investment topic that hasn’t gotten all that much attention is the movement of the U.S. dollar. After a few years of almost no volatility, the U.S. Dollar Index has fluctuated substantially in 2020. So, where is it headed in 2021?

As always, predicting currency direction is a challenging task. First off, you can only value a currency by comparing it to other currencies. It’s never just the dollar. Instead, it’s the dollar versus the euro, or the dollar versus a basket of other currencies. As such, it isn’t just what the dollar is going to do, but also what the comparison currencies are going to do.

For example, you may expect the dollar to weaken because of economic issues in the U.S.; however, if other currencies weaken even more, an investment vehicle that tracks the dollar may go up. The value of a currency is always relative to other currencies.

Moreover, multiple factors can influence a currency. Is the economy improving? Is the central bank pumping liquidity into the economy? Is there demand for the currency as a reserve investment? That’s just a small portion of the variables that can impact a currency.

One popular way to trade the dollar versus other currencies is through the Invesco DB U.S. Dollar Index Bullish Fund (UUP). UUP was sitting right at its 52-week lows as we moved into the end of the year. However, at least one large fund or trader has been placing a big bet that UUP will rebound by the first week of January.

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