Wall Street bets against the dollar

A strong U.S. dollar has benefits.

We're seeing that now as the price of crude oil plunges, pushing down gasoline prices to levels not seen since 2010. Economists are already looking ahead to the positive lift this will provide to the holiday shopping season as extra cash in the pockets of consumers lifts GDP growth.

The greenback's rise has been impressive. Since July, the U.S. dollar has gained nearly eight percent against a basket of other currencies, ascending to levels not seen in more than four years. The rise also has been impressive in its consistency, with the dollar not suffering a weekly decline between early July and late September.

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The dollar's climb is all the more interesting in that Wall Street is betting against it, putting up real money that the currency turns tail and moves lower. They are also betting that dollar-sensitive assets -- not just crude oil but also emerging market stocks, precious metals and more -- are set to rebound as a result.

This pattern is evident in the Commitment of Traders report from the U.S. Commodity Futures Trading Commission, which breaks out futures and options positions into three groups of traders. Commercial hedgers are considered the "smart money" insiders because they are involved day-to-day in the rise and fall of the dollar as commodity producers, multinational corporations trying to reduce their currency risk and others. The "dumb money" is considered to be the small speculators, including hedge funds and individual traders.

Tom McClellan of the McClellan Market Report combined the data not only from U.S. dollar contracts, but contracts in other currencies such as the euro, pound, Swiss franc and more to provide a holistic view of what the market thinks about the future of the dollar.

Earlier this month, the smart money ramped up its bet against the dollar to its highest level since the indicator started in 1999 when the euro was created. Other recent extremes included short bets against the dollar in the summer of 2013 and in the summer of 2012. Both coincided with short-term tops for the dollar.

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The folks at SentimenTrader are noticing an increase in bullish bets in areas of the market poised to benefit from a decline in the dollar, including emerging market stocks as represented by the iShares Emerging Markets (EEM), as well as gold, crude oil, and other currencies such as the Japanese yen.

While this doesn't necessarily mean that the dollar is going to crash lower, causing oil prices to soar, the situation should at least stabilize. And in the midst of all the stock market volatility we've seen lately, some stability will be a good thing -- even if it causes those at-the-pump prices to stop falling.

And for investors, this will create new opportunities in beaten down areas of the market such as precious metals, commodities and foreign stocks.

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.