In July of 2008 when the U.S. Dollar Index was historically low, commodity prices were flying high. Crude oil was at an all-time high of over $147 per barrel, gold had broken above $1,000 per ounce and wheat prices were over $13 per bushel.

As the dollar moved higher in the "flight to quality" rally in response to the economic downturn in second half of 2008, commodity prices fell sharply, with crude declining by over 75 percent, gold falling by 30 percent and silver and wheat declining by nearly 50 percent.

SINKING DOLLAR

As the Federal Reserve eased monetary policy by lowering interest rates to near zero, purchasing mortgage-backed securities from banks and increased lending from the discount window to increase the money supply, the U.S. dollar began to move lower in March 2009.

This economic stimulus and the cheaper dollar drew huge amounts of speculative capital back into risk trades, including U.S. equity markets, energies and other commodity and currency markets.

DEBT CONCERNS OVERSEAS

However, in late November 2009, the dollar began to move higher once again, as the debt concerns of Dubai World and Greece came to light. The short U.S. dollar carry trade began to unwind.

The sovereign debt concerns of Greece spread to other European Union nations including Italy—one of Europe’s largest economies—Portugal, Spain and Ireland and may threaten the very future of the union as this crisis develops.

PRESSURE ON THE EURO

So the euro is now under very real pressure from currency speculators, with Commitment of Traders data showing the largest net short position in the euro since the currency’s inception in 1999, combining the deutschemark, franc, lira, etc.

Until some positive movement is made by Greece to lower its debt to gross domestic product ratio, it is likely the current trend toward lower EUR/USD will continue, and therefore, the U.S. dollar will continue its rise to test 8,250-8,375 resistance levels, (see the figure below).

If the dollar continues to rise, it will have significant bearish implications for risk trades, including long energies, stock index futures and commodity prices across the board.

PUTTING THIS TO USE

The euro has lost over 11 percent of its value relative to the U.S. dollar since late November 2009. An example of the significance of this decline is a call I received recently from a U.S. citizen who is in the process of selling his home in France and wanted to hedge his exposure on the $625,000 euros he will be receiving approximately 75 days after the contract is signed for his income tax purposes.

I suggested that he use the CME’s FX euro contracts to accomplish this, as each contract represents 125,000 euros. By selling five euro contracts short and holding them until he receives the euros for his home sale, he will be able to protect himself from exposure to a continued decline in the euro during the sale.

If the euro moves lower, he will have gains in his futures account to offset the lost value, and if the euro moves higher, the losses in his futures account would be offset by gains in the euro’s value.

This is a good example of using the futures market to hedge currency risk.

Feel free to contact me with any currency and commodity trading and hedging needs. For more information on this topic, sign up for my webinar on March 3 at: http://www.pfgbest.com/webinar.

IMM Currency Specs Increasing Bets Long USD

CFTC data released Friday February 26th showed currency speculators increased long positions on the US dollar from $9.69 billion to 12.77 billion in the week ending February 23rd, according to Reuters News. This represents the highest level since September 2008.

In addition the data shows the net short positions in the Euro rose to 71,623 from 59,422 is the highest since its inception. Also significant is the size of the net short positions in the Pound Sterling increasing to 92,884, where hedge funds and other large speculators on the short side outnumber longs by over 5 to 1. Speculators increased net longs in the Aussie and Canadian dollars over the same period.

JAPANESE YEN (Contracts of 12,500,000 yen)

2/23/10 week 2/16/10 week

Long 30,432 35,691

Short 28,715 21,779

Net 1,717 13,912

EURO (Contracts of 125,000 euros)

2/23/10 week 2/16/10 week

Long 32,728 34,459

Short 104,351 93,881

Net -71,623 -59,422

POUND STERLING (Contracts of 62,500 pounds sterling)

2/23/10 week 2/16/10 week

Long 13,882 13,922

Short 76,766 70,001

Net -62,884 -56,079

SWISS FRANC (Contracts of 125,000 Swiss francs)

2/23/10 week 2/16/10 week

Long 12,119 10,763

Short 20,938 15,430

Net -8,819 -4,667

CANADIAN DOLLAR (Contracts of 100,000 Canadian dollars)

2/23/10 week 2/16/10 week

Long 40,224 35,026

Short 11,803 11,571

Net 28,421 23,455

AUSTRALIAN DOLLAR (Contracts of 100,000 Aussie dollars)

2/23/10 week 2/16/10 week

Long 51,882 43,315

Short 12,890 16,312

Net 38,992 27,003

(Source Reuters)