If you watch the news you have probably heard a lot about dollar depreciation these last few months. As part of the economic stimulus package, the Federal Reserve has had to keep interest rates at historic lows (thereby making the “price” of dollars very cheap) while borrowing enormous quantities of money from foreign and domestic lenders. These actions have weakened the dollar against several foreign currencies.
As a savvy investor, you should be worried about the decline of the dollar, because this directly hurts the value of your paycheck. However, like everything else in life, economic trends have two sides to them. In our case, dollar depreciation can actually be your opportunity to invest in other currencies. Even if you’re not particularly concerned about the recent decline, investing in foreign currency will help you to diversify your portfolio, which is always a good idea.
The most important thing to remember is that investing in a foreign currency must never be considered in isolation, so mind its impact on your entire portfolio. For example, let’s say you have $20,000 in U.S. investments and you read an article that is very positive on Brazil. Should you go ahead and invest $5000 in Brazil? If you do, you will have 20% of your overall investments in only one country. Ask yourself if you want that much exposure, especially since the Brazilian stock market is known to be quite volatile.
If however, you are still interested after careful consideration of your own investing portfolio, here are a few suggestions to gain exposure.
- Stock of Companies with Multinational Operations – Many big American companies derive a huge portion of their revenues from abroad. This means that when foreign currencies do well versus the dollar, the profits and stock prices of such companies get a boost. Examples of such companies are Coca Cola, Microsoft, IBM, Pfizer, McDonalds etc.
- Foreign Currency ETFs – These trade just like stocks on American stock exchanges and are backed by baskets of foreign currencies. In other words, owning a Euro ETF is like owning a money market account in Europe. CurrencyShares have a wide range of ETFs that provide exposure to different currencies. Another example is the SPDR Barclays Capital International Treasury Bond ETF. Make sure to check an ETF’s liquidity and trading commissions before buying it.
- Foreign Bond Funds – These mutual funds invest in bonds issued by foreign governments, i.e. they receive interest payments from foreign governments in foreign currency. As the foreign currency strengthens, the value of the interest payments converted into dollars goes up. Examples of such funds are Templeton Global Bond Fund and Aberdeen Global Income fund. Do watch out for high management fees and other costs before you purchase any mutual fund.
- Foreign CDs and Savings Accounts – Some American banks (notably Everbank) offer CDs denominated in foreign currencies. These CDs offer a higher rate of interest than dollar-denominated CDs, but carry the risk of exchange rate fluctuation, i.e. you may get back fewer dollars than you put into the CD if the dollar strengthens instead of weakening against the foreign currency. Currently, the 1-year Everbank WorldCurrency Australian Dollar CD offers 3.5% whereas the most competitive 1-year US CDs offer less than 2%. Unfortunately there is a high minimum amount you need to invest to open a WorldCurrency CD (around $10,000). Also note that all Everbank CDs are FDIC insured. So even though it does not protect against currency fluctuation risk, you are protected in the case that the bank becomes insolvent.
It is important to make sure that all foreign currency investments match your ability to take on risk. Go with reputable institutions and read the fine print on all your investments before you sign the dotted line.
I’d love to hear of any other ideas you may have about investing in foreign currencies, or any questions about the logistics of investing in the above.
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Great Post. I believe the process of quantitative easing has recently led to the devaluation of dollar. Also, I think it would be a great time to invest in distressed assets. Any comments?. Moneyning brought a good point investing in ETFs. It would not be a bad idea to look at REITs.
Thanks,
Kanishk
This is a great post. Thanks for sharing the interesting insight on foreign investments with us. In my personal experience, if you are a non-US citizen, you should definitely make use of your banking priviledges in your home country to invest in forex. Its the easiest and most risk-free way to do so. If you are a Chinese citizen, shifting money between an RMB account and $ account can be good strategy based on your own outlook.
Thanks for the suggestions. With the downward spiral of the US currency, international is the way to go. I’d definitely invest a portion only as well to play it safe.
I’d take it one step further guys, and go West and buy property. Currency is just that, a currency to buy something real.
Too bad the Chinese prop market is so frothy. The RMB should eventually appreciate to 4 or 5:1 USD. But, it seems the liquidity is already baking this in.
What do you mean by “liquidity is already baking this in”?
If you believe that the RMB should be $4 or $5 to $1 USD, you should buy now and wait for the appreciation.
Ah David, if it were that simple. Because of the abundance of cheap money, and the expectation of a revaluation in the ren min bi, prices in Shanghai, Beijing, Shenzhen, Guangzhou have been bid up to record highs.
I was exploring property in Xin Tian Di in Shanghai (very trending prime area) earlier this year, and first floor condo’s were going for RMB10,000 a square meter, or over US$1,100/sqft already.
Last one in, close the lights.
Ah you meant real estate. How about buying the RMB to buy the index?
Yes, property. If there was an easy way to just covert all your USD holdings to RMB, that would be a good way, minus the transaction fee. Too bad, there are heavy restrictions for foreigners in opening up local accounts and currency convertibility.
I’m actually very bullish on the dollar here as well, so I’d just stick to our good old greenback.
A buddy of mine was talking about investing in the Ruble…come on now. I’d throw a few dollars at the Euro, but the Ruble?
For the ultra long term, you may want to check out RMB (China’s currency). It could be decades, but as their middle class grows, their consumption for imports will increase relative to their exports. At that point, it would make sense for the Chinese to create monetary policy to increase the value of their currency (or at least stop devaluing it, something they are doing right now).
the major problem with mutual funds is those fees that steadily eat away at your returns. If i was to invest in mutual funds, i would only go for those that invest in gold and other precious metals. I am also weary of international investments because i dont know much about them- currently that is. i am learning
International investments can certainly seem unfamiliar and less-than-safe. But now that returns on investment returns are many times those of American investments, it’s no longer such a good idea to stay home from that party. Maybe start with familiar currencies such as the Euro or the Canadian dollar.
What about buying the universal currency- gold?
Gold turned out to be a great investment in the past couple years, but I wouldn’t really categorize it under investing in foreign currencies either because the value is mainly tied to the US dollar and no other currency.
I also don’t really like the investment all that much longer term, considering that it’s already run up so much, coupled with the fact that it’s not a consumable commodity.
I mean, gold has its place, but I would rather own other commodities.
I agree with David. Gold has had a nice little run up and arguably the main reason is that it has become easy for investors to buy gold through wildly popular ETFs such as GLD. The underlying demand for the metal has not particularly grown (in fact it has fallen in Asia, a big market)….anyone smell a bubble?
When something is already making headlines for its record high prices, I wouldn’t be too interested in jumping in right then.
ETF gets my vote. For those interested in foreign countries, they may also want to look into ETFs that track foreign stock indices. The big ones are very liquid and can work wonders to your portfolio (both in terms of diversification and performance).