How to Play $1K: Cash In With Currencies

Additionally, you need to evaluate a country's geopolitical and sociopolitical risks. Political unrest and uncertainty may impact the economy. So while Brazil has an impressive rate of interest, politically, it may raise some red flags. Keep abreast of headlines related to the country. Turn to the international section of your daily news source regularly for updates.

How to Play

Experts don't recommend a buy and hold strategy with currencies, where you don't change your position for 20 years. Since the world's economies can be quite volatile, currency traders have a relatively shorter investment outlook of three to five years.

When you buy one country's currency, you're giving up another, like buying euros with U.S. dollars. Like trading stocks on an exchange via an online broker, investors turn to online currency brokers to facilitate the swap. You can buy futures contracts, going long or short, depending on your expectations. To give this a try, FOREX.com offers a free practice account.

Fund Favorites

Kevin Baker, senior financial analyst for TheStreet.com Ratings, recently wrote "Top Currency Funds Bet Against the Dollar." The best-performing currency fund from March 31 to June 30 is the CurrencyShares Australian Dollar Trust (FXA), Baker says. The FXA tracks the amount of U.S. dollars needed to buy an Australian dollar and the fund was up 6.71% in the second quarter of 2008. CurrencyShares has a number of currency exchange-traded funds (ETFs), ranging from the Swiss Franc to the Japanese Yen. Many even offer monthly dividends.

Next, the CurrencyShares Mexican Peso Trust (FXM) gained more than 5% on the dollar's continuing weakness versus the peso. The third-place fund, PowerShares DB G10 Currency Harvest Fund (DBV) also jumped more than 5% in the second quarter.

Mind the U.S. Dollar

One expert tells me it might be time to reconsider investing in the U.S. dollar. "The euro/dollar is close to an all-time high. If the U.S. economy starts recovering you might want to own the U.S. dollar [now]," says Prosser. Plus, with the expectation that the Federal Reserve will begin raising the fed funds rates later this year, that may help appreciate the dollar's strength in 2009.

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