Over the last few months I have written several columns warning of the potential for currency moves to affect stock portfolios. I've also written about various types of products that allow do-it-yourself investors to access currency markets in their existing brokerage accounts without having to open a separate account to trade currencies.The decline of the U.S. dollar in the last few days in conjunction, perhaps, with the short-term selling in equities is exactly what I had in mind when I wrote those articles. The case for a general dollar decline -- not collapse, just a decline -- is compelling for several reasons, including the possibility for the euro to take on some of the role held by the dollar as the world reserve currency, the potential for the world to demand fewer dollars as foreign reserves diversify into broader baskets, and various country deficits. These are all reasons you've likely heard before. Even if you don't buy into this, the scenario is plausible and may be worth investing around on a long-term basis to reduce portfolio volatility if nothing else. There are quite a few products that provide access to the currency market and more on the way. The most recent products to list, which I wrote about
These ETFs have pluses and minuses. On the plus side they are easy to trade (with limit orders), provide easy access to currency diversification and pay some yield. The biggest negative is that buying a single currency requires time spent studying the dynamics of that exchange rate. Using the Canadian dollar as an example, there are several factors to consider before investing. For instance, the Canadian central bank is probably on hold for a while after a series of rate hikes, and while the Canadian dollar would probably benefit from an increase in energy prices, the currency recently took a hit on news about a change in the taxation of the Canadian royalty trusts. There are also several open-end funds, which I wrote about
in January, to consider. ProFunds has the ( FDPIX) Falling US Dollar Fund (FDPIX) and Rydex offers the ( RYWBX) Weakening Dollar Fund (RYWBX), which is the inverse of the dollar index leveraged 2 to 1. The positive of these funds is that they are simpler than the single-currency ETFs and the big negative is that the Dollar Index, which underlies both funds, is very heavy in just two currencies -- the euro and the yen. This is a negative because there could be better diversification opportunities in other currencies. One last fund to mention is the ( MERKX) Merk Hard Currency Fund (MERKX), which is an actively managed fund that invests in a combination of gold, short-term debt instruments and currency contracts. The benefit here is that the manager has generally captured the effect; the obvious drawback is there is no guarantee that he will in the future.
The move down in the dollar over the last few days has been very fast as currency moves go and although I generally expect dollar weakness over the next couple of years, it makes sense to believe that some of this last move will correct back -- that is, move back up -- at least a little. If you tend toward a short-term view, I doubt you have a good entry point today for these types of products. For longer-term portfolio construction, however, they may offer a way to reduce volatility. I believe the currency market will become much more important to equity-market participants in the next few years. The correction in the spring of this year started in the currency market; if this action of the last few days triggers yet another correction in stock prices, that makes it two times in just a few months. This has not happened in the U.S. recently. While perhaps not conclusive, it may serve as anecdotal evidence that currencies are more important than they used to be. Looking into and learning about this effect will allow you to at least make an informed decision on whether you should have currency exposure. Please note that due to factors including low market capitalization and/or insufficient public float, we consider the Currency Shares ETFs to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.