Three ways to profit from the soaring dollar

As the greenback soars to its highest levels of the year, one trader sees a couple of market areas that could ride the currency's coattails.

"I think we have to go with the ones that have been outperforming so far," said Frank Cappelleri, senior equity trader at Instinet, Wedsday on CNBC's "Trading Nation."

The IWM small-cap Russell 2000 ETF has already seen new highs on dollar strength. The IWM hit another intraday record on Thursday after reaching a closing record Wednesday.

"I will caution one thing" on the IWM, said Cappelleri. "The dollar is actually getting close to this resistance point ($93-$94 area) so that's obviously going to impede any real breakout attempts for the Russell if this continues like that."

The U.S. dollar index has not traded above 94 since December 2017.

The IWC micro-cap ETF should also catch favor from a higher dollar, according to Cappelleri. Like small caps, the micro-cap ETF traded at an all-time high Thursday. The ETF is up 8 percent for the year.

"The IWC has actually been performing better than small caps and we see this here over the last four months," he said. "It's more exposure to the dollar, obviously much more influenced by it."

The XRT retail ETF, Cappelleri's final pick for a dollar winner, has managed to break out through an inverse head-and-shoulders bottom. The pattern — which sees a low, a lower low, and a higher low — stretched from early March through to early May. The XRT broke out from that technical pattern to reach an intraday high on Wednesday not seen since Jan. 31.

Time will tell whether retail's breakout can continue, cautions Cappelleri.

"One thing is that the XRT still has just about 40 of its components reporting over the next 2½ weeks so it's really going to give us an indication of whether this breakout is real or not," he said.

The dollar's rise shows few signs of slowing down, according to Boris Schlossberg, managing director of FX strategy at BK Asset Management.

"It's basically an implied bet on U.S. growth," Schlossberg said Wednesday on "Trading Nation." "There's very little to see on the horizon that really threatens the dollar at this point. ... Only the geopolitical things that we can't predict could derail the situation."

The DXY U.S. dollar index was slightly higher Thursday, on track for its fourth straight session of gains. The index, which measures the greenback against a basket of other currencies, has added 1.5 percent for the year.



Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more