Currency Trading - dollar bears

The tension against the dollar is rising by the day. We’re seeing dollar bears in the most unusual places (Will Mr. Obama please stand up?)…and investors are getting squeamish about holding just dollars in their accounts with each passing day.

Frankly, the Fed isn’t helping matters. Last week, my colleagues and I gave you the full story on what the Fed has been buying behind closed-doors, and systematically pushing the dollar lower.

Ever since, readers have been sending us questions about how they should be battening down the hatches if the dollar does continue to fall in the long-term. Today, I want to address those questions.

If you’re like most Americans, odds are you have the majority of your portfolio, your 401k and home in dollars.

So, here are few quick ideas on how to diversify for the long-term that you can implement today.

1. Foreign Bonds: Most investors don’t consider foreign bonds “currency plays” per se, but it’s a relatively easy way to buy foreign currencies. Just like buying Treasuries, a foreign sovereign bond is backed by a foreign government.

You’re actually buying a foreign government’s debt, so they have an obligation to pay you back at a specific yield (should you hold your bond to maturity). On top of that, you have the potential for currency appreciation if that foreign government’s currency rises against the dollar. Most major brokers offer foreign bonds. You only need to ask.

2. Long-Term Currency Options: Long-term currency options, specifically on the PHLX or NASDAQ OMX give you the opportunity to buy and hold currencies for months, and take advantage of longer term downward trends in the dollar. We’ve written about options before. You can learn more about them here.

3. Currency ETFs: It doesn’t get much easier. Pick a foreign currency you’re interested in, and buy the ETF right on the NYSE through your regular stock account. Right now, there are over 25 ETFs to choose from (including several that invest in a couple currencies at once). Most of them have a wide variety of call and put options as well.
Don’t like a currency? You can short the ETFs like any other stock or fund.

4. Foreign Currency CDs: If you’re a long-term “buy-and-hold” investor, then this may be your best option. The reason? It’s just like a dollar CD, only it lets you buy and hold foreign currencies for not just months, but years.

Most foreign currency CDs have three-month commitments, but then you can roll over the CD for as long as you want. On top of that, a foreign currency CD generally pays higher interest than the “near zero” rates offered by American banks.

 

By Kat Von Rohr - www.worldcurrencywatch.com