The New Safe Havens

When a country that's known for its appetite for hard currency gives you the cold shoulder, you know the world is changing.

That's the message the Russian government is sending to the U.S. dollar. After progressively dialing up the rhetoric in the past couple of years, Russia is finally starting to take action to protect itself from the world's reserve currency. In particular, two separate things Russia has done this month will force the U.S. to take a critical look at its foreign exchange policy in light of what many have suggested could turn into a full-blown currency war. More importantly for you, it may also point the way toward lucrative investing opportunities you can take advantage of.

The Siberian two-step
The first announcement the Russians made was that it had agreed with China to open up trade of each country's currency on the other's foreign exchange markets. The move was intended not just to strengthen economic ties between the two countries but also as an attempt to unseat the status of the U.S. dollar as the world's primary reserve currency.

The more interesting move came later in the week, when Russia said it had added the Canadian dollar to its basket of foreign exchange reserves. In addition, a Russian central bank official reportedly said the Australian dollar would likely be the next addition to the currency basket.

There's nothing remarkable about the Russians' stance toward the U.S. dollar. Plenty of people have been worried about the dollar's long, steady decline for a long time, and especially in light of 2008's financial crisis and the spending spree that the U.S. government has embarked upon. What is remarkable, though, is that Russia has identified particular economies that could benefit from dollar destabilization.

Hard assets aplenty
The key to understanding the Russian move lies in the economic underpinnings of the currencies it added to its forex basket. Canada and Australia have seen both their currencies and their stock markets gain strength, due in large part to their vast natural resources. Australia's mining resources include iron ore, alumina, coal, and gold, while Canada has vast energy reserves, as well as gold, platinum group metals, and diamonds, among many other minerals.

With commodity investing gaining popularity in light of higher prices, both Canada and Australia have benefited. Canada has regularly run budget surpluses for more than a decade now. And both currencies recently popped above the value of the U.S. dollar, albeit temporarily.

Should you follow?
If you think the Russians' move is a smart one, you have a number of choices. To create your own basket of currency reserves, the CurrencyShares Canadian Dollar Trust (NYSE: FXC  ) and CurrencyShares Australian Dollar Trust (NYSE: FXA  ) act like a cash investment in their respective currencies. The Australian ETF even has the benefit of paying a monthly dividend -- which is a lot better than you'll get from most savings options in the U.S. right now.

You can also invest in stocks and bonds from the respective countries. The closed-end fund Aberdeen Asia-Pacific Income Fund (NYSE: FAX  ) owns bonds from around the Pacific Rim, with more than 40% exposure to Australia. The fund pays a yield of more than 5% right now.

On the stock side, the iShares MSCI Australia (NYSE: EWA  ) and iShares MSCI Canada (NYSE: EWC  ) ETFs track the benchmarks for the respective countries. Each has a relatively low expense ratio of 0.55% and has heavy concentrations in the natural resources sector. Alternatively, select individual stocks let you focus your investing. Australian mining giant BHP Billiton (NYSE: BHP  ) , for instance, is the world's largest miner and has operations around the world. Canada has a large number of relatively smaller players, but that makes it easier to use Canadian miners Teck Resources (NYSE: TCK  ) and North American Palladium to make targeted investments in the most promising parts of the economy.

Diversify your finances
If nothing else, Russia's decision to add diversity to its foreign exchange holdings makes sense from a financial management perspective. Your portfolio could benefit from the same idea. Given their wealth of valuable resources, both Canada and Australia are great places to look for investing ideas right now.

Currency concerns are just one challenge facing you in saving for retirement. Find some new ways to get yourself moving in the right direction. Click here to read the Fool's new special report, The 7 Secrets to Salvage Your Retirement Today.

Fool contributor Dan Caplinger loves old Soviet conspiracy-theory novels. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is nothing like the old man in that book by Nabokov.


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  • Report this Comment On November 26, 2010, at 1:11 PM, chohan wrote:

    TECK RESOURCES SHOULD TAKE OVER TIMMINCO (TIM.TO).IT'S STOCK IS VERY CHEAP AND IT CAN BE PROFITABLE BECAUSE IN NEXT 5 YEAR ELECTRICITY PRICE IS GOING TO BE DOUBLE,THEN POWER GENERATED BY SOLAR WILL BE CHEAPER .TIMMINCO IS A MINING COMPANY.IT IS PRODUCING SOLAR GRADE SILICON WHICH IS USED TO PRODUCE SOLAR POWER.I THINK TECK RESOURCES CAN TAKE OVER TIMMINCO .IT'S MY VIEW.

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