Recs

8

Profit From the Falling Dollar

U.S. investors can't seem to catch a break. Stocks are sliding, real estate prices have fallen sharply, and even the once-mighty dollar has dropped to unprecedented low levels against many foreign currencies over the past several years.

Some investors, however, have turned lemons into lemonade. By finding investments whose returns are tied to the dollar's fall, they've turned a prudent hedge into an unexpected windfall.

20% from a bank CD?
The dollar's slide encouraged financial institutions to create new products that would benefit from strength in foreign currencies. For instance, Everbank offers bank CDs whose returns are tied to the performance of certain currencies against the U.S. dollar. For instance, a one-year CD based on the Australian dollar currently pays 5.25%. A similar CD using New Zealand's dollar to measure returns pays more than 6%. That's well above the current U.S. average of 3.06%.

But on top of higher rates, those who chose Everbank foreign-currency CDs have gotten a big boost in their returns from the falling dollar. With the U.S. dollar down 14% against the New Zealand currency and more than 15% versus the Australian dollar, an investment in Everbank CDs last year would have yielded around a 20% return.

ETFs charge in
Another product that lets investors profit from the falling dollar comes from the ETF world. CurrencyShares ETFs essentially act like a foreign savings account, with which you buy shares that represent a certain amount of foreign currency. For instance, each share of the CurrencyShares Euro Trust (NYSE: FXE  ) equates to holding 100 euro. In addition to moving in response to currency fluctuations, many of the CurrencyShares ETFs pay monthly dividends.

As you'd expect, the falling dollar has led to strong returns from these ETFs:

ETF

1-Year Market Return

Euro Trust

22.27%

Yen Trust (NYSE:FXY)

19.78%

Australian Dollar Trust (NYSE:FXA)

21.69%

Swiss Franc Trust (NYSE:FXF)

23.48%

Canadian Dollar Trust (NYSE:FXC)

22.05%

Source: Morningstar.

What goes down ...
Of course, you can't count on these currency-based investments to continue performing as well as they have recently. The U.S. dollar will rise again, eventually. On the other hand, many market analysts have for years been predicting a halt in the dollar's drop, yet the dollar has continued to fall.

Perhaps the most important thing for investors to realize is that just as you can earn 20% or more from currency-based investments, you can easily end up losing money from them. Even though Everbank's CDs are federally insured, they don't protect your principal from losses if the dollar rises sharply.

In addition, even though their returns have beaten the stock market recently, these investments aren't stocks. Over time, if currency fluctuations stabilize, the interest you'll earn will probably be relatively low compared with historical stock returns. To combine stock-like returns with the diversification of foreign currency exposure, multinational stocks such as Royal Dutch Shell (NYSE: RDS-B  ) and Cemex (NYSE: CX  ) also give the potential for growth.

For the more conservative part of your portfolio, however, diversifying your savings into foreign currencies isn't necessarily a bad idea. Keep in mind, however, that you've already missed out on a big run in the currency markets -- and if the dollar's fortunes turn around, you'll lose money.

To learn more about getting the most from your savings, read about:


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 601129, ~/Articles/ArticleHandler.aspx, 9/17/2014 3:48:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 6 hours ago Sponsored by:
DOW 17,131.97 100.83 0.59%
S&P 500 1,998.98 14.85 0.75%
NASD 4,552.76 33.86 0.75%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/16/2014 4:00 PM
RDS-B $81.75 Up +0.69 +0.85%
Royal Dutch Shell CAPS Rating: ****
CX $13.18 Up +0.01 +0.08%
Cemex CAPS Rating: ***
FXA $91.00 Up +0.68 +0.75%
CurrencyShares AUD… CAPS Rating: *
FXC $90.66 Up +0.68 +0.76%
CurrencyShares Can… CAPS Rating: **
FXE $127.74 Up +0.16 +0.13%
CurrencyShares Eur… CAPS Rating: *
FXF $104.73 Up +0.28 +0.27%
CurrencyShares Swi… CAPS Rating: *

Advertisement