Dollar worries? How to invest in other currencies

May 12, 2011

If you’re wringing your hands about prospects for the U.S. dollar, take some comfort: You’re part of a large club.

With the Federal Reserve essentially printing money to help the U.S. out of the Great Recession, while keeping interest rates low, there’s not a lot of robust dollar-defending going on.

No wonder the buck is hitting three-year lows against major currencies. But these days, even if you’re not a gold bug, you’re not necessarily locked into the greenback. With the advent of currency ETFs and banks that let you hold foreign currency certificates of deposit, you can broaden your cash holdings with the click of a mouse.

“Currencies used to be exotic, but now investing in them has become much easier,” says Mike Rawson, an ETF analyst with Chicago-based fund research firm Morningstar. “You can go into your brokerage account and purchase currency exposure just like you would a stock.”

Rawson suggests keeping your currency plays to five percent of your portfolio or less, since it’s a relatively volatile niche. After all, there’s no guarantee that the U.S. dollar is destined to fall. It’s still the world’s reserve currency, and in tumultuous times, investors tend to flock to it as a safe haven.

But if you’re fretting about the dollar, Rawson says you’re not just being paranoid: There’s a solid rationale for being skittish. “There are good reasons why the U.S. might turn a blind eye to currency strength,” Rawson says. “A decline makes your exports more attractive, it makes imports more expensive, and it lowers the value of the total debt you have outstanding.”

So how to hedge against a potential dollar drop? The safest strategy is to buy a basket of other currencies, so you aren’t hostage to the political and interest-rate particulars of a single country. Morningstar’s Rawson likes PowerShares DB US Dollar Index Bearish, which holds a basket of currencies like the Euro and the Yen. For a more targeted play, he recommends CurrencyShares Euro Trust.

Don’t go overboard, though. Just because you can now bet your entire portfolio on the future of the Brazilian real, doesn’t mean you should. This is speculative stuff, in a highly volatile, $4-trillion daily market that’s dominated by large institutions. And foreign cash is still cash, which means your upside potential is limited by how much other currencies fall.

So unless you’re the next incarnation of George Soros, put aside the grand visions of yourself as a currency day-trader, making millions from forex. If you’re a mom-and-pop investor who is truly concerned about the dollar, then you might consider slotting a small portion of your cash holdings into other currencies.

You could hold foreign currency CDs from Florida-based EverBank, for instance, which offers rates on everything from the Australian dollar to the Indian rupee. “You get FDIC backing, and you get foreign currency exposure as well,” says Kirk Kinder, a financial planner and owner of Picket Fence Financial in Bel Air, Maryland, who often uses EverBank CDs for his clients. “So if you’re getting four percent on an Australian dollar CD, not only are you getting the four percent, you get an additional amount if the U.S. dollar depreciates.”

Of course, if you’re still reticent about dabbling in forex, relax: You might already be covered without even realizing it. That’s because megacap American multinationals already hedge currency issues as a matter of course, earning much of their profit overseas (and often keeping it there). If you own the S&P 500, then, you’re already essentially doing some currency hedging. And if you own international stocks denominated in foreign currencies, then you’re already holding an exchange-rate play with upside potential as well.

But Colorado retiree Chuck Hooper likes the more direct route, of owning EverBank foreign currency CDs. So much so he now has 17 of them, investing in everything from the Canadian dollar to the Brazilian real. “With all the debt we’re accumulating, I see heavy inflation coming, and I see other countries pulling away from the U.S. dollar,” says the 80-year-old former business owner. “I’m very concerned — and that’s why I think foreign currency CDs are the right path.”

5 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

I’ve traded forex for 6 years now and can say this about it. 90% of those that trade forex lose there money. It’s very difficult and takes years to understand. Gamblers and those that can’t deal with following the rules of money management or who can’t take the pressure of possibly getting stopped out on a trade will lose there money quick.

Posted by robertpv1 | Report as abusive

Keeping the dollar value low may wound national ego, but it may not be the worst possible thing imaginable. Domestic products will be cheaper than imports, which is really something we have been struggling to achieve all along. China has intentionally kept the value of the Yuan low for this exact reason, cheap domestic manufacturing and exports = trade surplus.

Posted by OrthoPraxis | Report as abusive

I fully agree with the warning issued by the previous commenter. Currencies are very volatile trading environments that feature very private networks that deliver information to professional traders much, much quicker than any publicly accessible system (including retail brokerage systems).

Being able to conveniently order-up a scoop of specific risk does not make it less risky. Don’t swim in these waters unless (a) you’re prepared to ride them daily, and (b) unless you can lose the majority of the investment value with no real harm to your financial health. The gains (if any) from forex come in relatively small amounts from large numbers of relational bets. Very few people have the time, skills, or finances to play this game.

Posted by Circa1954 | Report as abusive

Financial Sense just recently did a special on currency trading that I thought was pretty interesting. Although I don’t think I’d ever start trading currencies myself due to how volatile the market is, I think it’s very good to be aware of what’s going in such a large market.

Here’s the link: http://www.financialsense.com/financial- sense-newshour/big-picture/2011/05/07/03  /mike-mcmahon/the-dollar-is-bottoming-a nd-the-euro-topping

Posted by SimplyFoolish | Report as abusive

There are a currency rising in popularity as the dollar weakens, named BitCoin

It already showed on Forbes and CNN blog, thus I guess it is not a only adventurous thing.

More info on www.bitcoin.org

The bitcoin biggest USD exchange is www.mtgox.com

Posted by OrSpeeder | Report as abusive