The only way the Federal Reserve will stop waving its magic stimulus wand is if job creation miraculously comes to life, rescuing the economy.
I wouldn’t hold my breath.
And, as long as Ben Bernanke and company keep buying bonds to artificially stimulate the economy, the dollar will undoubtedly continue its downward spiral. After the Labor Department reported that the U.S. economy added fewer workers than expected in August, the dollar fell to its lowest level in eight weeks.
Add our nation’s nearly $17 trillion in federal debt, excess liquidity, credit-happy consumers and a massive trade balance to meager job growth, and the dollar’s further debasing becomes even likelier.
So, while investing in the U.S. dollar might be a losing proposition, some foreign currencies thrive under those circumstances or simply do fine on their own. If you like the idea of cashing in outside our borders, here are a few options.
Canadian Loonie
After the Fed alluded to easing up on stimulus in back-to-back meetings a few weeks back, the Canadian dollar dropped to a six-week low. Conversely, after poor news on the U.S. jobs front — and the news that Canada added jobs at triple the forecast rate — the loonie hit its highest level in two weeks.
So, as long as the U.S. remains status quo on its bond-purchasing plan, expect the loonie to gain momentum. Plus, the facts that Canada is resource-rich and a major exporter of oil and gold to the U.S. add a commodities angle and long-term aspect to the investment. Think of it as hitting the trifecta.
The best way for direct exposure to a rising Canadian dollar against the U.S. dollar is through foreign exchange (forex) trading. If you’d rather keep it simple, the CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC) will do the job.
Finally, a new group of actively managed exchange-traded funds focused on global currency movements will soon hit the market (courtesy of iShares) for yet another foray into the loonie.
Chinese Yuan
Pay no attention to talk of China’s slowing economy. Any economic powerhouse that experiences 10% annual growth over three decades is bound to take a breather. That’s precisely what China is experiencing and what plenty of investing gurus are overreacting to.
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| Demand for the Chinese yuan is unprecedented, which explains a 29% gain over the past six years and a currency-leading 3.7% increase in the first half of this year. | ||
It’s not as though unemployment or low productivity are threatening to snuff out the Red Dragon’s fire. On the contrary, the U.S. can only dream about the 7.5% annual growth that China projects in 2013.
Considering estimates that the Chinese economy could reach $123 trillion by 2040 — or nearly three times the economic input of the entire globe in 2000 — yuan investors are most likely in for a long, profitable ride. Although China isn’t expected to overtake the U.S. in per-capita wealth, China’s projected 40% share of global GDP would put the U.S. (14%) and Europe (5%) to shame nearly a quarter-century from now.
Demand for the Chinese yuan is unprecedented, which explains a 29% gain over the past six years and a currency-leading 3.7% increase in the first half of this year. Additionally, it appears that the yuan will be freely traded by 2015. There’s no place for it to go except up.
I’d suggest a long-term play such as CurrencyShares Chinese Renminbi Trust (NYSEARCA:FXCH), which has the lowest expense ratio, 0.40%, of yuan-focused funds.
Norwegian Krone
The world’s seventh-largest oil exporter, Norway’s krone is known as a “petrol currency.” It is backed by a government with zero debt, a budget surplus worth 11% of GDP, and a wealth fund worth $720 billion, or about $144,000 per man, woman and child.
Norway’s central bank, which issues the krone, also boasts one of the highest capital ratios of any central bank in the world at 23.3%. Best of all, it isn’t tied to any other currency, making it as low a risk as currency investing gets.
“The krone is not simply an alternative store of wealth, like gold, for example. It offers strong fundamentals, both structural and cyclical,”HSBC currency strategist David Bloom says. “Gold is a quasi-currency; (the krone) is the real thing. It does not simply reflect flows and sentiment. It is a currency that will reflect its economic fundamentals. These remain strong.”
Because no ETFs exist on the market to buy the krone — yet — consider Everbank.com. It offers a foreign currency account that functions like a money market and allows the transfer of money between major currencies.
Risks to consider: While the value of the U.S. dollar won’t likely impact the krone, the loonie and yuan are connected at the hip. You may see short-term moves if the Fed acts.
Actions to Take –> Currencies move very slowly, so the best way to buy them is to make regular diversified investments over time.
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– Karen Canella
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