A few lifelines left as the dollar sinks

CDs in other currencies, foreign holdings can help

On the Money

Your Money

January 04, 2004|By Janet Kidd Stewart

Pricier European vacations aren't the only way Americans' wallets could be stung by the falling U.S. dollar in the coming months.

Incentives on foreign luxury cars already have been disappearing faster than the Concorde on its last flight, and a top OPEC official warned recently that oil prices, which trade in dollars, may spike because the currency is weakening.

Higher oil prices generally translate into higher costs on a huge range of domestic goods.

Typically, imported goods shoot up in price when the dollar weakens. That didn't happen in the mid-1990s because non-U.S. companies held down prices to keep market share. In today's more profit-focused world economy, price increases are more likely, said John Vail, an economist with Mizuho Securities.

Overall, the dollar gained more than 30 percent against major world currencies in the latter half of the 1990s. Against the upstart euro, the greenback has given back 25 percent in the past two years.

Experts are predicting a continued weak dollar. Here's why, and some strategies for protecting the ones in your wallet:

Look for a rally, then another drop. A whopping trade deficit is partly to blame for the weak dollar, and market strategists see no end to America's buying its hard goods overseas, cutting factory jobs and boosting its service economy.

"This imbalance isn't going to correct itself soon," said Andy Busch, currency expert with Harris Bank in Chicago, who thinks it's amazing that the dollar's strength lasted as long as it did given the U.S. trade deficit.

He expects a typical January rally in the dollar, followed by continued decline. "We could go another 25 percent in the next year or so," Busch said.

Not everyone agrees. Some experts, including Vail, believe the run is at least half over and others even expect the dollar to begin a turnaround.

But if you believe the fundamentals are pointing to continued decline, there are some strategies to consider:

Boost foreign holdings. One way is to invest in large multi-national companies that export a big portion of goods overseas. Even U.S.-based companies that have a big foreign component are fair game.

Some fund managers, for example, picked up shares of Coca-Cola Co. last year partly because the company stood to benefit from lower currency levels.

One caveat: Don't invest in just any big consumer product company that ships out a lot of goods. "We bought Coke for the first time in years because it was trading at a good price, had conservative accounting practices and a strong growth outlook," fund manager Don Yacktman said. The exchange rate was just icing.

Another way to play the dollar curve is to buy foreign stock funds or bonds that don't automatically hedge currency risk for investors, notes Bruce Weininger, a wealth adviser with Deloitte & Touche LLP.

It should be in the fund's prospectus, or you can call Morningstar or the fund's 800 number, Weininger said. This way you benefit (or lose) both on the fund's performance and in the exchange rate.

Get in the game. For investors willing to put in at least $10,000, one bank in St. Louis offers a more direct play on the dollar's woes.

Everbank, at www.everbank.com, offers certificates of deposit that can be held in foreign currencies.

The products pay a defined interest percentage, but the investor also takes the currency risk for the period of the deposit. That would have been a smart bet in the past year, but remember that if the dollar turns around and gains against the currency you purchased, you could be in for a substantial loss.

Janet Kidd Stewart is a Midwestern financial writer.

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