Currencies

A foreign currency position is an important part of any portfolio. Since February of 1985 the dollar has lost over 50% of its value compared to foreign currencies. The fiscal and current account deficits that the United States faces indicate possible future downward pressure on the dollar. You must guard against the secular trend of dollar depreciation in your portfolio.

Countries that historically have strong current account balances and fiscally sound governments, like Canada and Switzerland have currencies that should outperform the dollar in the future. Investing in the currencies of well run emerging market countries like Brazil is a great way to take advantage of their appreciation.

Currencies are attractive for more than geopolitical reasons. Foreign currencies have a strong counter balancing effect on dollar denominated assets like stocks, corporate bonds, and treasuries. Assets that move against each other make a portfolio safer overall.

A portfolio allocation that includes currencies offers investors an opportunity to benefit from a market that isn’t dominated by short term traders. Many participants in currency markets are not profit maximizing. Many of the largest players in the currency market use it to hedge against currency movements to stabilize earnings from their foreign operations.

Currency ETFs have made it much easier for individual investors to participate in currency markets. ETFs that trade in currencies have created a liquid, efficient market for individual investors, that allows them to avoid the costs and time associated with buying actual hard currencies.

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