The Dollar in Decline
Sunday, September 23, 2007
Oh, the amazing shrinking dollar.
The U.S. currency tumbled last week to a record low after the Federal Reserve cut interest rates, continuing the dollar's six-year slide. Behind the latest drop is the expectation of weaker U.S. growth and stronger overseas economies. The slump took the dollar below $1.40 for each euro and put it at parity with the Canadian dollar for the first time in more than 30 years.
While U.S. tourists might think twice about a vacation abroad, investors are discovering a variety of ways to make a buck betting against the buck.
Wall Street is cranking out a multitude of new investment vehicles to make it easier for small investors to participate in global currency markets: a worldwide network of banks, hedge funds, speculators, governments and financial institutions that process about $1.8 trillion a day.
The investment products include certificates of deposit, mutual funds and exchange-traded funds packed with various currencies or linked to baskets of foreign exchange. More than $2.7 billion was invested in open-end currency funds by the end of July, up from $36 million at the end of July 2000, according to estimates by Lipper, a Reuters company.
"We're like Greyhound. Leave the driving to us. That's what a mutual fund does," said William E. Seale, chief investment officer of ProFund Advisors, which offers both a Falling U.S. Dollar and Rising U.S. Dollar fund, whose performances are linked to an index measuring the value of the dollar relative to a basket of six major foreign currencies.
So far, the falling dollar fund is the better bet: It is up 7.91 percent for the year, as of Thursday. The rising dollar fund is down 2.66 percent.
Some financial advisers say individual investors with an appetite for risk -- and who already have a portfolio of stocks, bonds and real estate -- may want to diversify further by putting a small portion of their savings into currencies, particularly those projected to continue appreciating relative to the dollar.
One traditional, relatively low-risk way to take advantage of a falling dollar is to simply buy the stocks of big, multinational U.S. companies that benefit from the weaker currency. A lower dollar helps boost U.S. exports by making them relatively cheap on world markets.
The Commerce Department reported recently that U.S. exports rose 2.7 percent in July, to a record high of $137.7 billion, reflecting stronger sales of U.S. farm goods, autos and auto parts and other manufactured goods. Beneficiaries include companies such as aircraft maker Boeing and construction and mining equipment maker Caterpillar.
A weaker dollar also benefits U.S. companies that have extensive service operations abroad, such as McDonald's and Coca-Cola, because the profit they earn overseas in foreign currencies is worth more when brought home and converted into dollars.
Another way for individual investors to profit from overseas economic growth is to buy foreign stocks and foreign-stock mutual funds. The U.S. investor converts dollars into the currency needed to buy the stocks, whether euros, pounds, yen or something else. Then, if the share price holds and the dollar falls, the investor gains when he sells the stock and converts the money back into dollars. If the share price has risen, the profit is even greater. Of course, if the dollar appreciates in the interim, the process works in reverse.