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Merk Hard Currency Fund Trusts Europe

European rates are on the rise. The Fed is nearing the end of its rate-hiking cycle. Gold is glittering past $500 an ounce.

Does this spell doom for the U.S. dollar?

The ECB made the Euro more attractive this week with its first rate hike in half a decade, but the U.S. dollar is still up over 13% this year against the European currency. Axel Merk, portfolio manager of the $5 million (MERKX), says the dollar's dominance will soon come to an end as the ECB gets aggressive and the U.S. fiscal house gets messier. Merk's fund, which invests in short-term money-market instruments of countries pursuing so-called "sound monetary policy", is down 3.1% since its May inception. More than 40% of the fund is comprised of Euro-denominated short-term bonds. recently chatted with Merk to get the hard facts on hard currencies.

The European Central Bank raised rates Thursday for the first time in five years. Are there more hikes to come?

The ECB has signaled very clearly that it wants to raise rates, but at the same time it is under tremendous political pressure not to raise rates too much. They do not want the euro to get too strong so that European exports are affected. So the overall reaction was muted, because it was widely expected.

Is the ECB on the right path?

We see a central bank that is doing its job in reining in the countries that are too lax on the spending side. They are trying to police these countries, but they only have one tool, which is changing interest rates. So far, they are doing a good job playing policeman.

More than a third of your portfolio is in Europe. Which countries outside Europe are being fiscally responsible?

The countries that we like outside of the Eurozone are the commodity rich countries like New Zealand, Canada and Australia. Those are countries that are benefiting from the boom in commodities. At the same time, they also have central banks that are aware of the potential bubbles that could spring up from their hot economies.

We try to stay away from more speculative Asian plays, notably Japan. We believe that the Bank of Japan is often politically motivated to put exports ahead of price stability.
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