Five Strategies to Profit from the Dollar’s Demise
The recession has it on life support, but it won’t last forever. Trillion-dollar deficits, low interest rates and weak growth are all going to spell trouble for the dollar once risk-averse investors get some confidence back in the markets and start moving out of ultra-safe, low-yielding treasuries.
But before we look at where you can stash your cash to protect its value, let’s look at just how the currency effect works…
Let’s say one dollar was worth one euro. Now, because you think the dollar is going to lose value against the euro, you trade 10,000 dollars for an equal number of euros.
Fast forward a couple years. You were right. The value of the dollar fell relative to the euro. Now, instead of one dollar being worth one euro, one dollar is worth 0.5 euros. Expressed another way, one euro is worth two dollars. So, now your 10,000 euros are worth 20,000 dollars — and you’ve doubled your money.
The boost works this way for any investments in an asset backed by nearly any other stable currency. Here are five ways to take advantage of the changing value of currency:
1) Buy U.S. Stocks with International Exposure
The more exposure overseas, the better. Many U.S. companies large and small do an increasing amount of business in far-off nations. Coca-Cola (KO), for example, receives more than half its revenue from overseas operations. That’s good, but a big chunk of the other half still comes from North America. Also, the company’s cash and most of its assets are dollar-denominated.
2) Buy ADRs
A purer play might be an ADR — an American Depositary Receipt for shares of a foreign company. Not only are they simple to buy — listed on U.S. exchanges and priced in dollars — but as soon as you buy them, you essentially own them in a foreign currency. This means that when the home currency of the company appreciates against the dollar, you make money as if you had bought the currency when you sell.
You can also nab gains when the stock price rises, making ADRs a potential double whammy. Add a company with a nice dividend, and now we’re talking real money. Toyota (NYSE: TM), Shell (NYSE: RDS.A) and Sanofi-Aventis (NYSE: SNY) all fit the bill.
3) Buy Actual Foreign Currency at Your Bank
Any bank will be able to offer several foreign currencies. Keep an eye on the rate compared with what’s published online, and spend a few minutes shopping around to make sure you get the best deal. While it’s unlikely that you’ll be able to get the exact rate that you’d see printed in the papers, which are typically based on million-dollar transactions, banks can offer fairly competitive rates. Also, the amount you’ll be able to buy will be subject to just how many Jordanian dinars, for example, the bank is holding, although many banks will try to accommodate your requests as best they can.
4) Buy Foreign Denominated CDs
Single currency CDs are offered by EverBank with three to 12 month durations. Rates vary between currencies and time frames. A 3-month Brazilian real CD earns 5.0% yearly. A 6-month Mexican peso CD earns 4.0% yearly. A 12-month New Zealand dollar CD gets you 1.75% yearly. All are protected from bank failure by the FDIC, but don’t expect them to pay if your currency crashes. Most foreign-denominated CDs require a $10,000 minimum investment.
5) Buy Foreign Exchange-Traded Funds
Foreign funds are a simple way to get currency protection and great diversification with low overhead. Whether it’s an index ETF like iShares All-Country World Index Excluding U.S. (Nasdaq: ACWX), a closed-end fund that invests in government bonds like Templeton Global Income Fund (NYSE: GIM), or a diversified mutual fund like the Bank of New York Mellon Emerging Markets Fund, you’ll get the effect.
Time to Get out of Dodge Ahead of the Posse
Just how you get out of dollars should depend on your particular risk profile, capital base and other investment preferences. But one thing is for sure: You’ll want at least some portion of your wealth in foreign currency-backed assets. And if you’re as negative on the dollar as I am, you’ll want that number to be at least 50%.