Currency investing by the “Main Street” investor, regular Joe’s and Jane’s like you and me, has exploded in recent years, thanks to the expansion of the exchange-traded fund (ETF) universe. Once the territory of hedge-fund managers and FOREX (Foreign Exchange) traders, it is now quite easy to invest in currencies of other countries.

The challenge is picking the right currency. In FOREX trading, currencies are traded in pairs. That means if I buy the Australian dollar, going long, I have to decide which currency I will make that trade against, the corresponding sale, or short.

#-ad_banner-#This complicates the issue. You could pick the right currency to buy, but trade it against the wrong currency and lose. For example, the Aussie dollar may strengthen against the U.S. dollar and at the same time lose ground to the Japanese yen. Trade the Aussie against the yen and you lose; trade it against the U.S. dollar, you win. You need to pick the right pair. Fortunately, most currency ETFs pair the namesake currency against the U.S. dollar. This simplifies the challenge a little, because we need only identify which currency we think is going to do well against the U.S. dollar.

But a different, less risky opportunity exists when focusing on the U.S. dollar. This is because the U.S. dollar can be bought long or sold short by buying ETFs that pair it against a basket of foreign currencies. Pairing the dollar against a basket of currencies means you only have to identify the overall trend for the dollar, not the underlying trends that vary against different currencies. This is similar to investing in a sector ETF rather than an individual company stock. It is all too common for investors to pick the right sector but the wrong stock.

There is little information available today that denies the fact that the U.S. dollar has been in a long-term and possibly permanent decline.

 

I say “permanent” because of the debt problems the country faces. With no solution in sight and partisan politics ensuring little meaningful discussion will occur, there is really nothing for the government to do other than continue to debase the dollar. [See David Sterman’s “Why Politicians in Washington Could Cause a Global Financial Crisis”]

The “printing presses” have been churning out excess paper dollars for 80 years and have to continue to do so. With an impossible debt load and a much too-small federal revenue stream to pay for it, terminating the money creation would force the United States into default. The necessity to create money will ultimately drive inflation higher, forcing up commodity prices and compelling more and more investors to invest in hard assets such as gold [see my article “3 Reasons to Still Own Gold (or Finally Buy Some)].

But nothing moves in a straight line. The U.S. dollar, like most securities, does and will experience periods of strengthening even while the long term trajectory is down. Therefore, it is possible to identify short and intermediate trends within a long-term trend and profit from the ups and downs.

Consider investing in these two ETFs:

1. PowerShares DB US Dollar Index Bearish ETF (NYSE: UDN) — The PowerShares DB US Dollar Bearish Fund is based on the Deutsche Bank Short US Dollar Index Futures Index. It’s designed to replicate the performance of being short the U.S. Dollar against the following currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc.

 

2. PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP) — The PowerShares DB US Dollar Bullish Fund is based on the Deutsche Bank Long US Dollar Index Futures Index. It is designed to replicate the performance of being long the U.S. Dollar against the following currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc.
 


The charts illustrate the negative correlation of these funds as well as the short, intermediate and longer-term trends. The fact that these ETFs are long or short the dollar against a basket of foreign currencies, makes them less volatile than their single currency cousins, yet the underlying opportunity remains for investors to profit.

Action to Take–> The dollar is in a long-term bearish trend that dates back 80 years and within that trend are short and intermediate periods of dollar strengthening. Utilize these two funds to protect your money and profit from the fall and rise of the U.S. dollar.

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