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5 ways to profit from the falling dollar
The dollar's tumble probably won't end anytime soon. With these key strategies, you can make sure you are ahead of the game.
By Michael Brush
Like a wounded tech stock, the once-mighty U.S. dollar has been on a downward spiral since last March -- and it doesnt look like its done losing ground yet.
Because declines will likely push beyond the 15% retreat so far, there are five ways you may want to tweak your portfolio now to benefit from further greenback weakness. You can:- add U.S. multinationals to your portfolio
- buy mutual funds that invest overseas
- purchase gold
- buy shares of companies that do business only abroad
- or buy foreign currencies.
Before we get to the details of these tactics, heres why the greenback is falling and why the swoon probably wont stop soon.
No more safe-haven status. For years the dollar has been the place for rich people around the world to stash their money in times of trouble -- like now. But the days of looking at the dollar as a haven are fading for several reasons, says James Paulsen, an economist who is chief investment officer at Wells Capital Management.
First, investors fear more terrorist attacks will hurt the U.S. economy. Next, the U.S. looks extended militarily, facing potential trouble on at least two fronts, Iraq and Korea, if not more down the road. Foreigners have also noticed that the Federal Reserve doesnt seem to have the power it once had to turn around the economy. If thats true, continued economic weakness will make it less desirable to hold U.S.-based assets.
Weak-dollar policies. To try to jump-start growth, the United States is expanding its money supply rapidly -- more rapidly than other parts of the world, like Europe. Creating excess dollars, in essence, cheapens the U.S. currency.
Also to spur growth, the Fed has pushed U.S. interest rates to lower levels than abroad. That makes it less attractive for foreigners to invest here, says Chris Orndorff, a market strategist and overseas equity analyst at Payden & Rygel. So they buy fewer dollars. Again, theres less demand for dollars. Recently, returns on two-year U.S. government bonds were around 1.72%. The same notes issued by the German government were offering 2.70% returns.
Finally, it looks like Washington has abandoned the strong dollar policy of the past seven years, and with good reason. Again, it gets back to sluggish economic growth. A weaker dollar boosts foreign demand for U.S. goods and helps the U.S. economy.
Trade imbalances. The United States buys a lot more from other countries than it sells to them. Foreigners take the dollars they earn and sell them to get their own currency back, putting more downward pressure on the dollar, says Paulsen. The United States is running a massive trade deficit worth over 4.5% of its annual national product -- or more than $450 billion a year.
Though all these reasons seem like theyll cause more dollar declines, its no sure thing. Jay Bryson, an economist with Wachovia, reasons that if tensions with Iraq are resolved, the uncertainties that are now holding back spending and business investment will dissipate. The economy will recover faster, U.S. interest rates will firm up, and foreigners will want to invest more money here. That will drive up the dollar, Bryson believes.
Historically, though, the dollar doesnt reverse course very fast. Instead, it tends to hold a trend for seven or eight years once it sets off on a certain path, Paulsen says. He thinks were at the start of a new trend now. Even if tensions with Iraq go away, too many of the problems weighing on the dollar will linger. I think dollar weakness a multi-year event, and we are only about nine months into it, says Paulsen. I think it could persist for another four or five years.
Here are five ways to make a declining dollar work for you now:
Add U.S. multinationals to your portfolio
Big U.S.-based companies such as Procter & Gamble (PG, news, msgs), Colgate-Palmolive (CL, news, msgs), Coca-Cola (KO, news, msgs), Wrigley (WWY, news, msgs), Texas Instruments (TXN, news, msgs), Caterpillar (CAT, news, msgs) and even the staffing company Manpower (MAN, news, msgs) earn lots of their profits overseas. Since theyre constantly converting those profits back to dollars, they naturally earn more as the dollar declines.
It wont be a 1-to-1 relationship, but there is going to be profit margin expansion and more surprises on the upside for these kinds of companies because of the decline of the dollar, says Orndorff, the analyst at Payden & Rygel.
Just be aware this tactic is no sure bet, for three reasons. First, fundamental business trends trump gains from dollar weakness. So if a multinational you buy runs into trouble, youll lose money no matter how weak the dollar gets. Second, companies that have lots of overseas expenses wont benefit as much. Even as revenues rise, when translated back into dollars, so will costs.
Third, some multinationals may start to use financial instruments to hedge against dollar declines; that would mean youd lose any benefit you were hoping to get from a weaker dollar. You dont know what the chief financial officer will do three months down the road, says Jean-Marie Eveillard, portfolio manager of the First Eagle Global (SGENX) and First Eagle Overseas (SGOVX) funds.
Buy mutual funds that invest overseas
Because of the challenges of picking multinationals, you might prefer the simpler move of putting more money in mutual funds that invest overseas. Most of them dont hedge against dollar declines, says Morningstar analyst Gregg Wolper. So thats no problem.
Linda Ray, an investment adviser with the New York-based Northstar Group, typically puts clients in Eveillards First Eagle Global and First Eagle Overseas funds for foreign exposure. Its easy to see why.
Even though the fees are high, theyre two of a handful of international funds with positive returns over one, three and five years, according to Morningstar. Eveillard, the value manager who runs these funds, chalks that up in part to the fact that he dodged the bubble stocks of the late 1990s. But hes also a smart money manager. The flip side is that value funds tend to underperform when economic growth is strong. But then, you wont be expecting a strong recovery if you are forecasting a weakening dollar.
You can use MSN Moneys Easy Fund Screener to find other strong performers. Among the ones youre likely to see atop the lists of those with the best one- and three-year returns include: GMO Global Hedged Equity III (GGHEX), Third Millennium Russia (TMRFX), Matthews Asian Growth & Income (MACSX), U.S. Global Investors Eastern Europe (EUROX), Pictet Eastern Europe (PTEEX) and Prudent Safe Harbor (PSAFX), up 29% last year. Many of these, of course, are narrowly focused on a region or country and that increases volatility, cautions Morningstars Wolper.
For broader funds that have lower expenses, decent long-term records, and managers who have been in place for a while, he suggests you consider Artisan International (ARTIX) and American Funds EuroPacific Growth (AEPGX). Investors can also buy MSCI European Monetary Union iShares (EZU, news, msgs), a basket of European stocks traded on the American Stock Exchange.
Buy gold
There are three reasons this strategy makes sense as the dollar falls. First, gold is priced in dollars. That means when the dollar declines against other currencies, gold looks cheaper to foreigners. So they buy more, nudging up the price of gold, says Leonard Kaplan, president of the commodities futures brokerage firm Prospector Asset Management, in Evanston, Ill.
Second, all the worries weighing on the dollar -- from war and terrorism to U.S. economic weakness -- are making people run to gold for safety. Result: Its price goes up.
Third, any more dollar declines could raise doubts about growth in Europe and Asia. Their goods would be that much more expensive to anyone buying in dollars -- if the dollar gets weaker. This could unsettle global investors even more. A sharp decline in the dollar will be bad for Europe and Asia, and bad news is what gold feeds on, says Eveillard, who also runs gold funds at First Eagle.
Buy companies that do business only outside the United States
This tactic is tricky if you are based in the United States. It is harder to investigate foreign stocks, and youll need a full-service brokerage. The upside is that if you get to take profits on a foreign stock, youll get even more money when you convert the profits back to U.S. currency, says Christopher Olson, co-portfolio manager of the Liberty Acorn International (ACINX) and Acorn Foreign Forty (ACFFX) funds.
Naturally, the best place to look is in sectors abroad where companies cant do business in the United States. Local banking, health care and retail come to mind, says Olson. In these areas, his fund has positions in Anglo Irish Bank (GB:198789), Nestor Health Care (GB:631303), which supplies nurses to hospitals and facilities for the elderly, and Topps Tiles (GB:486150), a British retailer of ceramic floor tiles.
Companies among Eveillards top-10 holdings with strictly European exposure include: Buderus (DE:527800), a German company that sells boilers, and Corporacion Financiera Alba (ES:ALB), a Spanish holding company with a significant stake in Carrefour, the big European retailer.
Buy foreign currencies
The cleanest way to profit from a falling dollar is to use the greenback to buy foreign currencies. Then you wait for the foreign currencies to go up in value as the dollar weakens and buy back even more dollars.
In practice, you have to be a serious investor to carry this out. Its more complex than placing stock trades in an online account. Instead, says Lisa Finstrom, senior currency analyst with Salomon Smith Barney, to invest in currencies youll have to open a commodities account at a commodities brokerage or a major Wall Street brokerage.
Next, youll need to learn about financial tools like options and futures -- instruments that give you the right or obligation to make big currency transactions in the future. Theyre the common ways to invest in currencies. You can also use a commodities account to short a dollar index traded on the New York Board of Trade.
And be prepared for large-account minimums that are designed to screen out less sophisticated investors. Kaplans Prospector Asset Management wont accept investments for less than $25,000.
Finally, youll likely have to pass a credit check because these accounts give you an amazing amount of room to buy on margin (In other words, borrow your brokers money to invest). For just a few thousand dollars of collateral, for example, you can margin up and get exposure to more than $100,000 worth of foreign currencies.
With leverage like that, you can put down a few thousand dollars and double it if currencies change value by just a few cents in the right direction. But you can also lose just as much and face an ugly margin call pretty fast -- making you wish had never bet against the mighty dollar in the first place.
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