The U.S. dollar rose versus the euro on Thursday amid signs of higher inflation in the United States while reports showed contraction in the euro zone's economy.
Analysts said higher prices in the short term may help boost the case for U.S. interest rate hikes and the dollar -- which in turn would increase the return on dollar-denominated assets -- but over time it would hurt the U.S. economy.
"Higher inflation is positive for short-term interest rates in general, but an inflation-driven rise in yields wouldn't necessarily be good for the dollar in the medium term," said Bob Lynch, a currency strategist at HSBC in New York.
Meanwhile, in a research note Merrill Lynch wrote, “inflation is expected to remain an issue during coming quarters, fueled not only by higher commodity prices, but also by wage increases and an attempt by companies to rebuild profit margins.”
Here’s how Merrill recommends playing it.
Industrial Congloms. Chemicals
Food Products Semiconductors
Household Products Metals & Mining
Source: MerrillLlynch U.S. Quant. Strategy
Traders, how would you play it?
Jeff Macke, Tim Seymour, and Guy Adami all say to get long the dollar.
Or try Quint Tatro’s patriot trade. It’s longthe UltraShort MSCI Emerging Markets ProShares and long the Ultra S&P500 Proshares against it.
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Trader disclosure: On Aug 14, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Quint Tatro Is The Principal Of Tatro Capital; Tatro Owns (C), (GS), (INTC), (JPM); Tatro Capital Owns (GS), (EEV), (QQQQ), (SPY), (SSO), (UYG)’ Adami Owns (C), (AGU), (GS), (MSFT), (INTC), (NUE), (BTU); Macke Owns (MSFT), (COST), (UUP), (WMT); Seymour Owns (AAPL), (EEM), (MER), (TSO); Jon Najarian Owns (WPI) Call Spreads, (NVDA) Call Spreads