With the dollar falling, why not bet against it? Here's why
Filed under: Economy, Investing
Retail investors would do well to avoid this trade: Betting against the U.S. dollar using one of the currency funds or ETFs that have sprung up to take advantage of our flaccid greenback.No, it's not because the dollar is strong or even appears to have much upside anytime soon. As we have said before, as long as the Federal Reserve continues to print money through a zero-interest-rate policy, the U.S. keeps running a big trade deficit and other nations move their foreign-exchange reserves out of dollars, the buck has no place to go but down.
But that doesn't mean investors should go chasing returns. That's a fine strategy if you're a Big Swinging, uh, Jerk on Goldman Sachs's (GS) trading desk, but it's one of the cardinal sins of investing for regular folks. The idea, recall, is to buy low. As Morningstar analyst David Kathman wrote Tuesday, just because funds and ETFs that benefit from from a falling dollar are doing well, it's pretty clear the easy money has been made.
"You might look at such returns and be tempted to think that these funds would make good investments," Kathman said. "But that kind of thinking is potentially dangerous, because it assumes that recent results will continue indefinitely. (They never do.)"
Chasing returns is usually a bad idea in any case, Kathman added, "but currency movements are especially volatile and highly unpredictable, often defying macroeconomic factors and the predictions of experts." Sure, it's possible that you could get good short-term returns if you bought a falling-dollar fund right now, but you could easily get burned, he says.
Unfortunately, it's never been easier for retail investors to play the currency game. Just five years ago, only one fund was luring them with the siren song of a burning buck, the Franklin Templeton Hard Currency fund (ICPHX). Cut to today and at least a dozen currency mutual funds and ETFs are playing everything from the U.S. dollar to the Russian ruble to the Brazilian real.
But just because you can make a bet on something doesn't mean that you should. And, as ever, it's important for regular folks to stick to their investment horizons. The dollar may be off 15 percent since March, but that doesn't mean it won't find a floor -- or come crawling back sooner than anyone thinks. For one thing, the weak dollar is killing America's trading partners. As DailyFinance's Eric Wahlgren wrote Tuesday, the Europeans have woken up to that fact that a weak dollar/strong euro is hurting their exports. And they're screaming for relief.
Then there's the case that as much as China and Russia are rattling their sabers about creating an alternative reserve currency to the dollar, it's much easier said than done. More than 50 percent of the world's debt is denominated in bucks. Good luck unwinding all those positions anytime soon.
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Reader Comments (Page 1 of 1)
10-20-2009 @ 7:59PM
David S. said...
I agree if you bet against the troubled dollar, or whatever standard of currency is used where you live, you only resort to owning something. Remember The Great Depression?? Everyone took their money out from banks and piled most of it into stocks. Do You know the risks of " Putting all Of Our Money, including Social Security funds into one place", then if one person looses, we all start to loose. That causes Banks To fail, and then the only currency will be the Barter System, Or swapping goods services, etc. Trouble with that is that the elderly That's My personal opinion. Speaking For Myself.
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10-21-2009 @ 12:16AM
Tech said...
Nonsense! I trade and this is how the dollar game works. First (since 1971-Nixon) the Federal Reserve note lost it's ties to silver and gold-remember those silver certificates? You could take those silver certificatesto any Federal Reserve Bank and they had to give you pure silver on demand. Not so the Federal Reserve Note! So what backs it other than the full faith and credit of the "government"? Oil! If you follow the price of oil the dollar trades opposite and likewise gold and silver. If the dollar is falling and oil is rising then Commodites or commodity currencies will rise and right now the Aussie dollar is doing very well and pays a lot more interest than the Federal Reserve Note. Australia sells resources to booming China and is a nice way to play the booming Chinese economy without investing in China. Use charts on stock charts.com and check out Kitco.com and trade gold, oil and the dollar etc. Until the dollar has devalued and America makes money as a nation then don't hold it's paper! JP Morgan's ghost.(would you buy a stock in a company that loses money all the time? -no.--well?)
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10-21-2009 @ 1:44AM
ymbel said...
The dollar will not sink!: I think I also heard that said about a ship called the Titanic. Listen folks don't listen to these morons who are themselves slowly slipping away to the life boats while they calmly tell you that all is fine. With their talk of".... that's fine strategy if your a big swinging,uh,jerk on Goldman Sack's trading desk..." crap:"gee I don't want to look like one of those bad Goldman Sacks type. I think I'll keep my investment in dollars. If all goes to hell the least they can say about me is that I was a real stand-up guy not like those crooked Sacks guys".
And I'm getting tired of that old refrain "a weak dollar is good for our exports". That's like saying " he's got cancer and at best a couple of months to live. But boy what a great set of teeth and hair-he definetly won't be lonely.
Listen to people who will give it to you striaght and have a proven record. People like Peter schiff,Jim Rogers,Gerald Celente, and the good people over at lewrockwell.com.
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10-21-2009 @ 9:47PM
Scott Brown said...
Scratching my head over here. Does this mean invest in the dollar, Mr. Burrows?
Oh, I get it. The dollar is too big to fail. We'll just bail it out with...hmm.
Wait a minute...it'll come to me...
Oh, okay, we'll just declare war on anyone who accepts Euros or other currencies or commodities for their oil. Um...
No, okay, got it. The government can just outlaw precious metals, confiscate whatever durable goods people own, and forbid the hoarding of foodstuffs and seeds. Make the Amero look good to us when it comes.
But seriously, what was the point of this article?
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10-22-2009 @ 12:09AM
checkers said...
Individules don't have the funds to play the short dollar game, so what's the point!. If you really feel that this house of cards will fail, then stock up on Whisky, Tobacco and Coffee... In a deep depression these items are worth more than gold.
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10-22-2009 @ 2:55AM
Louis Ricciardi said...
As soon as they start raiseing interest rates Gold will go down in flames . It's just another bubble scam .
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10-25-2009 @ 2:15PM
Ron said...
Cheney bet against it right before systematically taking our country apart
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10-25-2009 @ 7:48PM
Roderick said...
Do exactly opposite of what Berneke and friends say. Those crooks and our new dumbed down Congress men and women are going to continue to hand off the wealth of America until they turn the world upside down.
The truth is the dollar has dropped 30% since March not 15%. The truth is the Wall st rally is due directly to bail out money that propped up Goldmans, Aig, Fanny and Freddie. 40% of this Wall St rally is directly tied to those "to big to fail" walking zombies.
They will soon come from the grave and ask their host, (Ben Berneke) for another transfusion, (your taxdollars.
To big to fail is another word for socialism. The dollar will not be called cash. Stay away from investing in it as it can now be manipulated at will and will be.
Since all countries now are on a fiat system the world will see worldwide inflation. That spells cash is trash.
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