John Crooks says the US dollar is one of the few bullish currencies for 2009. Investors can profit by going long on dollar ETFs, or shorting other currency ETFs. But to make really huge returns, John recommends using options and investing in the exotic currency markets.

This from Sovereign Society:

The hardcore dollar bears said we were crazy for even mentioning the idea that the dollar could rebound during all this economic turmoil.

How could the dollar possibly rally during the worst financial crisis in a generation? (That was a year ago before we knew how far and wide the credit crunch would reach.)

But the fact is, that’s exactly what’s happening now.

I’ll admit that the dollar didn’t rally right away. It took months. In fact, the dollar index didn’t bottom until the day after the Fed bailed out Bear Stearns.

But then, the dollar slowly started to creep higher. And since mid-year, the dollar has been on a tear against the world’s major currencies. In fact, the dollar has jumped 16% just since September.

Crisis Profiteering: Your Dollar Profits from Credit Crunch

And it looks like this dollar rally will continue.

In fact, the dollar is one of the few currencies we are long-term bullish on for 2009. We see the dollar rallying through at least the first half of 2009. As I said on Tuesday, the dollar will continue to fly high on a combination of…

• Its Safe Haven Status: Scared traders are running back to the world’s reserve currency as the credit crunch continues to sweep the markets.
• The Mad Dash for Cash: Stock investors are still dumping whatever is left of their portfolios and running back into cash (in this case, the U.S. dollar).
• Whoever Can Fix the Crisis Gets the $: For now at least, it seems Forex traders believe the U.S. is better equipped to deal with the credit crunch, so they’re pouring money into dollars.
• Crisis Feeds Low-Yielding Currencies: During recessions, Forex traders run for safety, so they trade in their high-yielding currencies for the safety of lower-yielding currencies. So the dollar, now yielding 1%, actually has an advantage right now.

Yes, You Can Invest in a Dollar Rally With Foreign Currencies

Now it may seem strange to play a dollar rally by investing in foreign currencies, but actually there are a couple key ways to profit off this massive dollar rally next year in the currency market.

You could call your stockbroker, and simply ask to short any number of currency ETFs, or even go long the few dollar ETFs they have available.

That’s an excellent way to play the dollar rally – particularly if you’re a longer-term investor. However, ETFs only offer conservative returns (15% to 20% – definitely not bad, assuming stocks continue to plummet).

But in my opinion, there is a bit more interesting way to play this dollar rally either in the options or exotics market. For one reason: Leverage. Leverage allows you to invest a smaller amount, but still shoot for the big gains – often double or triple-digit gains in just a matter of weeks.

Where to Find the Double or Triple-Digit Dollar Winners

The Philadelphia Stock Exchange (now known as the NASDAQ OMX) offers six different currency options that you can buy versus the U.S. dollar.

These currency options trade just like regular stock options, with regular calls and puts. They expire just like stock options, so you only hold them for a short period of time. Also, you only pay the premium for any one contract, so you never risk a penny more than your initial investment.

All World Currency Options are in dollar terms (so there’s no ugly conversion math to trade these). So for example, the British pound option contract tracks the price of the British pound in dollars.

The problem is, they do NOT offer an option on the dollar. So to take advantage of the dollar rally, you need to choose the currency that looks to drop the farthest against the dollar. Then you simply buy a put option on that particular currency.

It’s the same in the exotic Forex market. The exotic Forex market tracks the fast-moving emerging market currencies, so small moves can often lead to large gains. Also, the Forex market trades with both 10:1 or 100:1 leverage depending on what kind of “lot” size you use.

So to take advantage of this dollar rally, you would choose the emerging market that looks set to sink the fastest. Then simply pair that emerging market with the stronger dollar.

This year, our exotic subscribers have been doing just that. For instance, we paired the Hungarian forint with the U.S. dollar in July. We held this USD/HUF pair for a little over a week and made 361%, counting leverage.

Then we did it again. We paired the U.S. dollar with the Thai baht (USD/THB) and made another 334% for our subscribers. A couple larger plays on the Polish zloty and South African rand made 2,948% and 2,997%

Honestly, I’m not saying this to brag. I want to use it as an example of the potential of trading this small corner of the Forex market.

And likewise, you can also find similar opportunities in the options market (we’ve recommended winning options worth 127%, 185%, even 300% during the worst of the credit crisis this year).

But honestly, these are just two strategies to play the dollar rally. There are plenty more.

Source: How to Play the Great Dollar Recession Rally of 2009