"Investing" in currencies is a non-starter.  It is more correct to call it speculating.  Currency fluctuations are notoriously hard to predict and can move very fast in any direction.  Unlike stocks, which have a natural upward trend due to steadily rising economic growth (except maybe right now!) and corporate profits, currencies can have decade-long stretches of movement in one direction.  The issues that move exchange rates are numerous and hard to predict; they include: relative interest rates or economic growth rates between various countries, global demand for investment in one country, monetary policy, etc.

Given the significant exchange rate swings over the past few years, there is starting to be a lot of talk about "investing" in currencies...say the Euro...because it is has recently risen a lot against the dollar.  There are now emerging a lot of ETF and mutual fund products meant to satisfy that desire.  Of course, most experts now predict that the dollar is poised to regain some of its lost strength.  Now would seem like a very bad time to speculate on the dollar falling further, but of course anything can happen.  If someone does decide to try betting on currency fluctuations, this should certainly not be viewed as a long term investment strategy, but rather a speculative trading idea. 

We do not speculate on currencies.  Our clients have benefited some from the falling dollar by holding a substantial portion of their assets in foreign securities.  Also, since 2006 we have been moving our US stock holdings to focus more on multinationals who have global businesses.  This was not done from an expectation of exchange rates, but rather from a view that faster growing foreign economies would deliver better profits.

We do hold foreign currency bonds for Expat clients who plan to retire in Europe, but I wouldn't call that speculating in currencies, rather we are working to hedge for them the potential lost value from holding USD bonds when the dollar falls in value.  I wouldn't recommend that to a US retiree. 

No doubt there are many firms out there right now trying to "sell" currency-linked products to their clients...selling what is hot has always been a favorite trick of Wall Street.  My advice is to focus on holding a global mix of high-quality assets and avoid trying to divine the movements of any investment over a short term; your odds of success are at best 50/50, and you probably have better things to do.

Source:  Maxim Global Wealth Advisors, By Andrew Fisher, CFA, CPA - 2008

Maxim is a premier wealth advisor for American expatriates residing outside of the United States. We are specialists in comprehensive wealth strategies involving investment management, tax strategies and financial consulting. We created our Knowledge Library in order to help expats increase their financial intelligence and to enable well-informed decisions. We hope you find this information useful and we invite you to contact us for more information on our wealth management services.

Maxim Global Wealth Advisors      —      www.maximadvisors.com