Average investors can use foreign-currency vehicles
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: February 6, 2003
Looking to get rid of some of your dollars? I’m not suggesting a shopping spree, but you might want to follow the lead of the smart money around the world. The smart-money investors these days are switching their rapidly weakening U.S. dollars for gold and euros and even the New Zealand dollar to protect the value of their holdings. Good news: You don’t have to watch from the sidelines. Everbank, the nationwide division of First Alliance Bank, makes it possible for average Americans to do the same type of hedging--by opening FDIC-insured money market accounts and CDs denominated in foreign currencies.
There’s a growing list of reasons to switch from dollars to something perceived as safer. As I noted in my Dec. 19 column when gold was trading at $342 an ounce, smart money is seeking safety. This week, gold surged to more than $382 an ounce. The euro, which was trading at 102 in that column of six weeks ago, is now trading at 109.
Why switch from dollars?
Foreigners and wealthy U.S. investors have plenty of reasons to be switching their holdings out of dollars:
* Dollar deposits pay a lower rate of interest than accounts in many foreign currencies.
* Investments in the U.S. stock and bond markets don’t look as attractive these days.
* Americans are running huge trade deficits, sending more and more dollars overseas to buy goods we import.
* One Federal Reserve governor noted that the Fed stands ready and willing to print dollars to keep the economy from slipping into deflation. Huge new supplies of dollars make current holdings less valuable.
No wonder the value of the dollar is slipping against gold and foreign currencies.
So what can you do about it? If you’re willing to think globally about the value of your dollars, you can now act locally while buying foreign-currency CDs.
You don’t have to invest a lot of money to participate in the foreign currency opportunity. You can open an FDIC-insured Everbank CD denominated in any of the major world currencies for a minimum of $10,000. Or, you can open a single-currency FDIC-insured money market account for a minimum of $2,500. For details go to www.Everbank.com or call (800) 926-4922 or e-mail firstname.lastname@example.org.
Currently popular are the euro, Swiss franc, the Norwegian krone and the New Zealand dollar. Last year the New Zealand dollar appreciated 26 percent against the dollar, so you can see the possibilities.
You can also buy a diversified index CD, such as the “European Opportunity CD,” which covers the currencies of Hungary, Poland and the Czech Republic.
You earn interest at the current rate being paid by that currency or index, and in addition you have the chance to benefit if the currency appreciates against the dollar.
Here’s an example. Let’s say you invest $10,000 today in a one-year euro CD. The CD pays 2.12 percent in euros compared to about 1.6 percent in a one-year U.S. dollar CD. So you’re earning slightly more interest in the euro CD, but that’s not the real reason for making the purchase.
The exchange rate right now is at 1.09 euros to the dollar. But suppose the dollar weakens and the euro strengthens during the year you hold the CD. And in one year perhaps the euro goes to 1.20 to the dollar.
Then at maturity, you’d get your interest--$233 in dollars. Plus if you convert your CD back into dollars, you’d have a little more than $1,000 in currency profit. Total cash returned: $11,242.57.
You can take your profit in dollars, taxed partly as ordinary income on the interest, and partly as a capital gain on the appreciation. Or you can roll the profit into another currency CD. As easy as opening a good old-fashioned bank account, you’ve become an international currency trader! And you’ve preserved the value of your dollars.
Beware of risks, too
Foreign-currency CDs--like gold or silver--are alternatives to the dollar. But all those alternatives have risks. The price of gold could drop if there is a quick resolution to the situation in Iraq. A resumption of economic growth in the United States might make the dollar more attractive again. Or terrorist activities in Europe might cause a flight to the safety of the dollar. But we’re learning every day that we live in a small world.
Just because we think in terms of dollars doesn’t mean everyone else does. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp.