That could be further from the truth…

Inflation is comprised of three things. One of them, is the velocity of money. If money is moving quickly from one hand to the other, inflation is more likely to pick up the pace. But if the velocity of money is slowing down, it means people are buying less.

As this credit crisis worsens, the velocity of money will continue to shrink. So it doesn’t matter how much credit the Fed creates, banks will refuse to lend because they know they will have bigger losses in the future that they’ll need to cover.

So far, the US Dollar has reacted exactly as you would expect if the velocity of money shrank…

The US Dollar Index Climbing Higher

This is a three-year weekly chart of the US Dollar index (which tracks the dollar’s value against six other major currencies). I chose a weekly chart because longer term charts tend to give clearer buy and sell signals (they just take longer to play out).

If you’ll notice, the USD spiked 22 percent higher beginning in July of 2008 and continued up until November. The fact that the dollar spiked on bad news is a huge bullish signal that shouldn’t be ignored.

And there are now three more reasons why the dollar is primed for a move higher…

1. The USD is finding support at a previous resistance line back formed in May of 2005.
2. The USD is also showing a bullish cross of its 200-week and 20-week moving averages.
3. And lastly, the slow stochastic and RSI both favor a move higher.

The USD could pass 88 in the weeks ahead, but I expect it to make a hike up to 90 – 91.

A good way to play this move is to buy the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP).

If you’re feeling bold and seek to maximize your gain, you could buy shares in the Double Short Euro ETN (NYSE:DRR.IV). So if the euro drops against the dollar by 10 percent, you’d be up 20 percent.