Currencies: Don't Let The Dollar Get You Down

The greenback will probably stay anemic, but new ETFs and other instruments offer protection

The euro and other currencies have trounced the U.S. dollar since 2002, and the trend is likely to persist into 2007, perhaps longer. The reason: Massive U.S. trade deficits--$586 billion in the first nine months of 2006 alone--mean we're flooding the globe with more dollars than foreigners want to hold. With no end in sight to the trade deficit or the U.S. budget deficit, the greenback should be under pressure for years.

Whether you want to protect your wealth in a global sell-off or profit from the shrinking dollar, there are new ways to do it. In recent months, eight currency-based exchange-traded funds (ETFs) have been launched, making currency investing as easy as buying and selling stocks. Also, there are now eight currency-focused mutual funds vs. just two five years ago. Go online and you can open bank currency accounts.

As a hedge against the beleaguered greenback, the euro is probably your best bet. "If the dollar will decline, it will decline against its major trading partners' currencies--the euro and the yen," says Frank O. Trotter, president of EverBank Direct, an online bank that deals in 25 currencies. The euro may be the better play for now, though Japan's financial picture is improving. "The euro is establishing itself as a world reserve currency in competition with the dollar, and many countries are looking to sell their dollars and buy into it," says David Reilly, Rydex Investments' director of portfolio strategies. "China's central bank has over $1 trillion it wants to diversify, so it's moving into euros."

To buy euros, you could purchase Rydex' Currency Shares Euro Trust, an ETF, or open a euro-denominated three-month CD at But the ETF yields 2.6% to the CD's 2% and doesn't lock up your money.

ALTHOUGH THE EURO SHOULD be a good long-term performer, it has gained more than 50% against the dollar since its low in 2002 and may cool off in the short run. Michael Hasenstab, manager of the Franklin Templeton Hard Currency Fund (ICPHX ), thinks the Swedish krona and Polish zloty will strengthen because of trade surpluses and productivity growth. But he's also a fan of more speculative plays in Asia. "We added the yen for the first time in five years," he says. "Japan's banking sector and consumer spending are improving, and it looks like interest rates will rise." He also favors Singapore, Korea, and Thailand.

If you're uncertain which currency to buy, stick with a diversified fund like Hasenstab's, which has been around for 17 years. Newer funds such as Merk Hard Currency (MERKX ) and Prudent Global Income (PSAFX ) currently avoid most emerging markets and even Japan. Both favor the euro, the Swiss franc, and gold. They are also buying the currencies of Norway and Canada, where demand for oil and natural resources has led to trade surpluses. It's the mirror image of what's happening with the greenback.

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