It is All Japan's Fault

On Wednesday, the Federal Reserve released its Beige Book, a report on the state of the economy compiled individually by each of the Fed's 12 district banks. In what should be a surprise to exactly no one (at least those that watched Chairman Ben Bernanke's speech on Tuesday), four of the districts reported that economic growth was slowing. Only Dallas wrote of accelerating economic expansion. The U.S. dollar index rallied on the news, but had been rallying all session. The U.S. dollar index was up nearly 0.50% at one point. The Fed acknowledged that rising food and fuel prices had dampened consumer's demand, but pinned most of the blame for the sluggish economic growth on global factors. The Fed cited supply disruptions in Japan and weather catastrophes in the United States as the primary reasons for the slowing pace of recovery. Investors may be seeking a safe-haven in the dollar. But how long will that trade last? With a potential U.S. default less than three months away, the dollar's rally may come to a swift end. Action Items Bullish: Traders who believe that the dollar will only rally from here might want to consider the following trades:

• PowerShares DB US Dollar Bullish Index UUP is a pure long play on the U.S. dollar. UUP might rally if the dollar continues to appreciate.
• iShares Lehman Aggregate Bond AGG is long play on U.S. treasuries, which may do well if the dollar does well.

Bearish: Traders who believe that the dollar's safe-haven status will soon end may consider taking positions in the following:

• SPDR Gold Trust GLD is a play on gold. If investors flee the dollar, they may buy gold.
• PowerShares DB US Dollar Bearish Index UDN is a short play on the dollar. If the dollar depreciates, UDN may rally.

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