Dollar falling. Invest here.
To profit from the falling dollar, you can invest in multinational companies or mutual funds that invest abroad. But the most direct way to bet against the dollar is through currency funds.
It has not been a good year for the US dollar. In April, it hit a nearly 3-1/2-year low against the Canadian dollar and a more-than-65-year low against the Australian dollar. It stood at a 15-month low in relation to the euro after sliding more than 20 percent since last June. On May 3, it fell to an all-time low against the Swiss franc.Skip to next paragraph
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All of this has left some US investors wondering:
Is there a way to capitalize on the sliding US dollar – and protect the value of a dollar-denominated portfolio?
Much depends on the time horizon. In the short term, quite a few analysts expect the greenback to start strengthening, at least among major currencies. In the longer term, many analysts expect the value of the dollar to fall against some emerging market currencies. So, if you're a dollar bear, consider shifting assets into stock or bond mutual funds that invest overseas. Even stocks of US multinationals offer some opportunity, since they earn profits in many different countries.
The more direct way to profit from a sliding dollar is through currency funds. Most of these mutual funds and exchange-traded funds in the United States essentially bet on the value of the dollar falling, says Jeff Tjornehoj, senior research analyst at Denver-based Lipper, a fund-information firm. Currency mutual funds typically invest in various foreign currencies and currencylike issues, versus ETFs that typically focus on a single foreign currency against the dollar.
Strength of currency funds
Currency funds have been gaining in popularity, at least in part, amid a rise in negative views on the dollar. In this year's first quarter, the category drew in some $479 million of net assets, according to Morningstar Inc., an investment research company based in Chicago. That's in sharp contrast to 2010, when some $275 million flowed out of currency funds. As of March 31, 2011, the funds had $7.9 billion in assets, according to Morningstar.
One fan of currency funds – specifically those focused on emerging-markets currencies – is Jerome Booth, research head of Ashmore Investment Management, an investment-research firm based in London. Of his own personal assets, "emerging markets currency investments are my second-largest holding," he says. "It's important for the US economy that exports do well. And for that to happen, the US dollar needs to decline further" – especially against the currencies of faster-growing economies.
This past December, Ashmore launched a US mutual fund for investing in emerging markets currencies – initially for institutional investors and now for average (or retail) investors as well. This month, Prudential Investments in Newark, N.J., launched the Prudential Emerging Markets Debt Local Currency Fund, its first such fund for US retail investors.
"We think there is tremendous opportunity for investors … who are recognizing that there are higher returns available in emerging markets, and in particular, emerging market currencies," says Cathy Hepworth, a senior portfolio manager for Prudential's fund. "People are aware of the weak dollar and, given what's been happening in the US, I think that trend will continue."