How to make the most of shrinking dollar

PERSONAL FINANCE

November 18, 2007|By EILEEN AMBROSE

Supermodel Gisele Bundchen grabbed headlines when she reportedly demanded to be paid in euros instead of dollars. Her spokesman later denied it. Long before that, the greenback had been out of fashion with billionaire Warren E. Buffett, who repeated last month that he remains down on the dollar.

Big deal, you might say. You're not planning a trip overseas anytime soon. And you're willing to forgo imported brie in favor of Vermont cheddar until the dollar strengthens.

But small investors can take advantage of the weak dollar, just like the big players. And some new investments make currency plays easier.

A word of caution: Don't let the weak dollar dictate your overall investment strategy. And make currency plays with only a small piece of your portfolio. That way you won't get badly burned if the dollar suddenly regains its muscle.

That said, consider these moves:

Bank on foreign currencies

Florida-based EverBank offers money market accounts and certificates of deposit in 20 foreign currencies, including the euro, Swiss franc, Indian rupee, Icelandic krona and Australian and Hong Kong dollars.

EverBank converts your U.S. dollars to your foreign currency of choice. You gain if that currency rises against the dollar.

You need at least $2,500 to open a money market account and $10,000 to buy a CD for a term of three-, six-, nine- or 12 months.

The money market account doesn't pay interest on balances under $10,000. CD rates depend on the currency and term. As of last week none of the Japanese yen CDs paid interest, while the 3-month South African rand CD paid a 7.71 percent annual rate.

But don't get distracted by interest rates. "You are buying it for the diversification and the chance that the dollar continues to weaken against that currency and you would gain from that currency appreciation," says Chuck Butler, president of EverBank's world markets.

Deposits are FDIC-insured against a bank failure, but they're not protected against losses from currency swings.

ETFs for currencies

Rockville-based Rydex Investments in the past two years has launched CurrencyShares, a series of exchange-traded funds that track the price of eight currencies. ETFs are similar to index mutual funds that trade like stocks.

Each ETF buys foreign currency that's held in a bank account in London. You see your shares go up or down based on the value of the foreign currency compared to the dollar.

You also reap a bit of interest that the currency earns sitting in the bank. The annual ETF fee is 0.40 percent of invested assets.

Bonds from abroad

Long-term investors might consider bonds issued by foreign governments.

EverBank's Butler recommends bonds issued by countries whose economies are at the peak of their growth cycle. Yields are usually high. Once a country's economy slows, interest rates on new bonds will be lower and that will make your bond worth more, he says.

Get foreign exposure at home

The traditional currency play for small investors is to buy stock in a U.S. company that does business overseas. A weak dollar boosts the company's exports because its products are cheaper to foreign consumers.

Companies also may get an earnings bump when profits from overseas operations are translated into U.S. dollars.

Or choose an international fund investing in foreign companies.

Make a currency play by choosing a fund that doesn't hedge against currency swings, says Paul Brahim, managing director of BPU Investment Management in Pennsylvania.

You will benefit when profits and dividends are converted from a strong currency to the weak dollar. A dividend worth, say, 1 euro means $1.46 for you, Brahim says. Check the fund's prospectus to see if it hedges currency risks.

Contrarian play

A sign that the market has peaked is when you start getting stock tips from taxi drivers. Can it be that currencies are poised to reverse course when supermodels talk about the weak dollar?

Chuck Carlson thinks so. "You won't talk to anyone that thinks the dollar will strengthen," says the chief executive of Horizon Investment Services in Indiana. "It's such a consensus opinion, to me it can't be true."

If you're in the contrarian camp, no worry. EverBank and Rydex also offer investments if you want to bet on the dollar's comeback.

Questions? Comments? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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