Forex Funds for Bulls and Bears

In recent years, the weak dollar has helped boost the appeal of foreign stocks and bond funds, as the returns generated by these securities look even better when converted into dollars and cents. But there's also growing interest in a relatively new investment category: funds that invest directly in foreign currencies.

Currency funds can provide investors with exposure to international markets without the risk of the individual companies that issue stocks and bonds -- which could be particularly appealing now that foreign stock and bond funds have had such a strong run. They also can be used to hedge specific holdings that are particularly exposed to currency shifts.

The first few offerings in this category were open-end mutual funds, but over the past year or so, a number of exchange-traded funds that track currencies have been launched, providing some low-cost options for investors who are active traders.

While there are reasons to believe the dollar will remain weak, given America's imbalance of trade with the rest of the world and the relatively stable outlook for interest rates here, exchange rates can be volatile.

PowerShares, a unit of Amvescap(AVZ Quote), is getting ready to roll out two ETFs based on the Deutsche Bank U.S. Dollar Index Future Excess Return Index. The PowerShares Deutsche Bank U.S. Dollar Index Bullish Fund, which will list on the American Stock Exchange under the symbol UUP, will track the value of the dollar in relation to a basket of six major currencies -- the euro, the yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc -- while the PowerShares Deutsche Bank U.S. Dollar Index Bearish Fund, which will trade under the ticker UDN, will be negatively correlated with the index.