How To Play The Bouncing Dollar

By SIMON CONSTABLE
A DOW JONES NEWSWIRES COLUMN

NEW YORK -- The once-sickly greenback is making something of a comeback, and it looks likely to continue, at least for a while.

For the nimble investor that means there are profits to be made.

The past month has seen the dollar bounce from a low of about $1.514 per euro to $1.425 recently. But it is still way down from the March high of around $1.264.

There is reason to believe that it could go higher.

"There is a solid chance the dollar will remain on a stable-to-rising trek over the next year," writes Michael Darda, director of research at Greenwich-based MKM Partners, in a recent research report.

Recent readings in the Index of Leading Economic Indicators from the Conference Board indicate U.S. economic growth of up to 7% "over the next several quarters," which would be good for the greenback, he writes.

That shocker also fits with some indicators I pointed out in a recent column. (See: The Case for a V http://blogs.wsj.com/economics/2009/12/10/the-case-for-a-v-could-7-growth-rates-r turn/).

So, how to trade this trend? One simple way would be to purchase the PowerShares DB US Dollar Index Bullish (UUP) exchange-traded fund. It tracks the performance of the greenback against the euro, British pound, Japanese yen, Canadian dollar, Swedish krona and Swiss franc.

That's OK so far as it goes, but there are other ways to trade the trend, potentially with more upside.

"Domestic high-yield should do well in such an environment; under the premise that a strong dollar would reflect a recovering U.S. economy," says Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

He doesn't mention them by name, but investors might think about the SPDR Barclays Capital High Yield Bond (JNK), iShares iBoxx $ High Yield Corporate Bond (HYG) and PowerShares High Yield Corporate Bond (PHB) exchange-traded funds.

Another angle to profit from a rising dollar is to reverse the trades that did well as the dollar rose, notably, materials and mining stocks and export-led businesses, explains Barry Ritholz, a veteran investor and author of Bailout Nation.

The Vanguard Materials ETF (VAW), which tracks a basket of materials stocks, is one such example. It has rallied almost 90% since early March, so it might be time to take profits, anyway, even for those skeptical about a dollar rally.

Alternatively, dump the exporters and go for importers. Those could be retailing firms that manufacture clothes abroad and import to the U.S. A couple of ETFs devoted to retailing stocks are the Powershares Dynamic Retail Portfolio ETF (PMR) and SPDR S&P Retail ETF (XRT).

There is one thing to be clear about, though. This is what the trend appears to be right now, but it could change very quickly.

And that's why I started this column using the words "nimble investor."

So be ready to shift course on a dime if the winds change.