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Our Top Four “Stable” Foreign Currencies (and Three Easy Ways to Buy Them)

April 21, 2011

    In our last article, I gave you a brief overview of  how to think about currencies (remember, the hole in the boat illustration). I also showed you the charts of nine currencies that have all appreciated against the U.S. Dollar over the last two years. My point with that article was to deal with any misconceptions that you may have about holding foreign currencies.

    At this point, it is important to distinguish “holding” currency from “trading” currency. “Holding” a currency is what you do everyday when you have a checking or savings account, a brokerage account, or a retirement account. In the end, all of these accounts are held and settled in one currency. But the act of “trading” currencies is much different. “Trading” currencies refers to a specific and speculative action in which you bet for, or against, one currency (done in pairs) during a short period of time. This concept is similar to trading stocks, only in this case, the financial instrument being traded is a pair of currencies

    In this article series, I am referring to “holding” currency, not to the short-term “trading” of them.

    Our purpose for “holding” some of our six-month liquid savings reserve in other stable foreign currencies is not rooted in speculation. Instead, it is motivated by a desire to protect our long-term purchasing power.

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    Four Examples of Stable Foreign Currencies

    The U.S. Dollar has been a losing proposition for some time. Over the last decade, the world’s reserve currency has lost over one-third of its value.

    This means that those who have held their liquid savings strictly in U.S. Dollars over the last decade have had to earn a 36+%  return just to break even and protect their principal. Without a doubt, inflation is truly an eroding factor on our money.

    But what you don’t see in the above chart is that some other currency went up while the U.S. Dollar went down. You see, currencies are a like a see-saw. One currency cannot go down unless another rises.  So, to say that “the U.S. Dollar is falling” is an incomplete statement. Instead, we should say that “the U.S. Dollar is falling in relationship to another currency, or a basket of other currencies.”

    Several years ago, I wanted to know which currencies would benefit from a falling U.S. Dollar. After some research, I came up with a short list. Below are four examples of foreign currencies that have benefited from the falling U.S. Dollar over the last several years. They are listed in no particular order.

    The Australian Dollar

    Over the last decade, the Australian Dollar has risen a staggering 102% against the U.S. Dollar.

    Pros: Australia is a resource-rich nation and the world’s third largest producer of gold. As commodities rise, Australia will continue to do well. So far, Australia has been successful at navigating its way through the global financial crisis. Unlike the Federal Reserve’s destructive easy-money policies, the Reserve Bank of Australia (Australia’s version of the Fed) confronted the economic crisis head on by raising key interest rates back in the Fall of 2009. Additionally, Australia’s stock market outperforms most others every year.

    Cons: While I would not characterize Australia’s dependence on the commodity markets as a tremendous negative, it is a risk factor. If global demand for commodities slows dramatically, this could hurt the country, which in turn, would negatively affect their currency. In particular, a slowdown in Chinese commodity demand could hurt Australia, as the two countries have grown into powerful trading partners. There are also some carry-trade concerns.

    The Swiss Franc

    Over the last decade, the Swiss Franc has risen dramatically against the U.S. Dollar. And in the last three years alone, Switzerland’s currency has risen over 17%.

    Pros: The Swiss have had an amazing ability to stay out of the modern rise of global militarism. Switzerland is known for its highly advanced financial services sector, confidential banking, and relatively low inflation rates. The Swiss Franc is considered by many analysts as the one of the most stable currencies in the world. For this reason, it is often considered a safe haven in times of global upheaval. For example, the Swiss Franc has been a big beneficiary of the recent tensions in the Middle East, as well as Japan’s quake and nuclear disaster.

    Cons: I am not currently bullish on the Swiss Franc (for at least the next 9-12 months), as I feel it is currently overvalued against the U.S. Dollar. It is possible that the U.S. will raise interest rates before the Swiss do, which could send the U.S. Dollar sharply upwards against the Swiss Franc in the near term.

    The Canadian Dollar

    The Canadian Dollar has risen steadily against the U.S. Dollar for the last decade and is up over 6% during the last three years.

    Pros: Like Australia, Canada is a tremendously resource-rich nation. It is a prime beneficiary of rising global energy demand, as it holds the world’s second largest amount of oil reserves and is the world’s largest uranium miner. Their huge amount of natural resources allows them to often operate on a trade surplus.

    Cons: Canada is America’s top trading partner with over 80% of its exports coming to the United States. This obvious over-dependence upon continued U.S. consumption poses some risk to Canada’s economy.

    The New Zealand Dollar

    Over the last decade, the New Zealand Dollar has risen over 82% against the U.S. Dollar.

    Pros: Also known as the “Kiwi” Dollar, this currency benefits from New Zealand’s abundant supply of natural resources. Like Australia, they are increasing exports to China.

    Cons: Like other commodity driven economies, New Zealand’s economy could be hurt by a slowdown in global demand.

    3 Easy Ways to Buy Foreign Currencies

    1) Buy and Hold the Physical Currency. Buying physical foreign currency is as simple as picking up the phone and calling your local bank. Almost all larger banks have a foreign exchange department where you can trade in your home currency for another currency. The fees on this vary, so you will have to contact your bank for more details. I have found that this is often the most expensive way to purchase foreign currency.

    2) Buy a Foreign Currency CD. A few years ago, an FDIC-insured bank called Everbank began offering their clients access to foreign currencies through the familiarity of Certificates of Deposit. The Foreign Currency CD’s are unique, in that your principal is FDIC-insured up to $250,000 against a bank failure. However, your principal is not insured against loss in the foreign exchange markets. Typically, you will need a minimum of $10,000-$25,000 to open one of these accounts. I encourage you to look at Everbank’s website. It has some wonderful resources for those who are thinking about diversifying into foreign currencies.  You can learn more about Everbank and their foreign currency CD’s here.

    3) Buy Currency ETF’s. You can gain direct exposure to many foreign currencies today through ETF’s (exchange-traded funds.) For example, those who want to buy the Australian Dollar can simply purchase the CurrencyShares Australian Dollar Trust ETF. (Ticker Symbol: FXA.)

    Here’s a brief list of many that are available:

    • FXA – CurrencyShares Australian Dollar Trust
    • FXB – CurrencyShares British Pound Sterling Trust
    • FXC – CurrencyShares Canadian Dollar Trust
    • FXE – CurrencyShares Euro Trust
    • FXY – CurrencyShares Japanese Yen Trust
    • FXM – CurrencyShares Mexican Peso Trust
    • XRU – CurrencyShares Russian Ruble Trust
    • FXS – CurrencyShares Swedish Krona Trust
    • FXF – CurrencyShares Swiss Franc Trust
    • BZF – WisdomTree Dreyfus Brazilian Real Fund
    • CYB – WisdomTree Dreyfus Chinese Yuan Fund
    • CEW – WisdomTree Dreyfus Emerging Currency Fund – Active
    • EU – WisdomTree Dreyfus Euro Fund
    • ICN – WisdomTree Dreyfus Indian Rupee Fund
    • JYF – WisdomTree Dreyfus Japanese Yen Fund
    • BNZ – WisdomTree Dreyfus New Zealand Dollar Fund
    • SZR – WisdomTree Dreyfus South African Rand Fund

    Each of these trade daily on the financial markets just like a stock. This means to get started, you simply need to open a brokerage account at an online discount brokerage firm (like Etrade or Scottrade.) Transaction costs will be about $10 to buy and $10 to sell. This is by far the easiest and cheapest way to buy foreign currencies. But without a financial advisor, you are completely on your own. You should always talk with a financial professional before diving headlong into the markets.

    Until Monday,

    Jerry Robinson –

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