Investors dissatisfied with the traditional equity markets might consider looking for opportunities in the currency markets in 2009.
Right now the U.S. dollar is taking a beating, and steps that the
and the U.S. Treasury are taking to stimulate the economy are not likely to stop the greenback's freefall any time soon. Through an online trading account, investors can access international currency markets and sell the U.S. dollar against any number of currencies that may enjoy a better outlook in 2009.
"What we are looking at right now is a shift in the dollar from strength into weakness and that provides some opportunities for the investor to take advantage of," says Brian Dolan, CEO of GAIN Capital Management and chief currency strategist for Forex.com.
In an interview with MainStreet.com, Dolan, who is also co-author of "Currency Trading for Dummies," explains what active traders should look for in order to benefit from currency exchange next year.
: What do you see happening in the currency markets in 2009?
: We look to go into 2009 with a weak dollar with potentially further declines coming. The key thing to watch is that we have a sentiment shift -- if the market believes that the fiscal stimulus and the debt issuance that the U.S. is going to do is ultimately going to be positive for the U.S. economy and bring us out of our recession sooner rather than later, then the dollar weakness represents a longer-term buying opportunity.
My window is that the dollar is going to stay weak through the first quarter and that we might begin to see some bottoming in the dollar into the second quarter. More likely than not, by the second half of the year, the dollar should begin strengthening again.
: So, should investors bet against the dollar through the first quarter?
: Yes, but I would keep a close eye on what's happening with the fiscal stimulus and U.S. economic data, and if signs of improvement become apparent, then you should begin to switch and anticipate a stronger recovery in the dollar.
: What else can investors accomplish through currency trading?
: You can always use the currency markets to hedge currency risk. For example, if you own $45,000 of various European shares, you might decide you want to protect against downside movement in the euro. What you would do is, since you are already long in the euro by virtue of your stock holdings, you would sell a portion of your European stock position. You might decide you want to hedge 20% of your risk or 50% of your risk by buying options in the dollar. That's a decision the individual investor has to make.
If the euro depreciated against the dollar, your hedge would profit, so you would be short euros in your hedge account. The euro would go down and you would make a profit (from your options) that would offset some of the equity loss. And if the euro were to strengthen, your hedge would limit your upside from further euro strength, but the gains you would be making from the underlying equity position would offset the losses on the hedge.
: Do you have any other advice for investors who may want to trade in the currency markets?
: Investors that want to get into the currency markets need to do their homework first. They need to understand money management and risk management. They also need to spend some time on a practice account to experience activity in the foreign exchange market without really risking any money.
It is also important to note that there is a difference between investing and speculating. Much of the activity in the currency market is based on short-term speculation. It's much more of trading as an enterprise as opposed to buying shares of
and holding them for the next 15 years.
: Is there any way to access currency markets if you are not an active trader?
: Exchange-traded funds for currencies have become very popular, and that's another way that's easily accessible for retail investors.
This article was written by a staff member of TheStreet.com.