Should I Invest in Foreign Currencies?
If you’re looking for another way to make your dollar grow, you might consider doing away with the dollar entirely and investing in foreign currencies. The Forex market, once the home of large institutional brokerages and hedge funds, is now available to everyday investors through margin accounts.
While it may sound risky and exotic, foreign currency exchanges are now part of the financial globalization process with instant access to virtually any type of currency to anyone with a computer. If foreign currencies sound like they might be for you, there are a number of ways you can invest in them right from your home.
The Foreign Currency Market
Most investors are accustomed to basing gains and losses on the value of the U.S. dollar, but thanks to globalization, there are now ways to profit from other currencies. The dollar’s value fluctuates on a daily basis against other foreign currencies like the euro and the yen.
A strong dollar means goods from overseas become cheaper by comparison, while a weak dollar means more goods can be exported as foreign currencies go further to buy American-made products. Investors can take advantage of these differences by holding foreign currencies and taking advantage of appreciation against the dollar or by shorting, or selling, those currencies against a rising dollar.
As the global marketplace becomes more interconnected, holding currencies of other countries can be a good way of diversifying against domestic economic downturns.
Here are a few ways you can invest in foreign currencies:
Forex Trading – If you want to invest in foreign currencies directly, you can open a Forex account. Initial deposits are generally very low, under $1,000, and allow you to trade leveraged currencies to boost returns. Investors should note, however, that many currency leverages can be in excess of 200:1, making it a high risk trade that could result in big gains or losses in a single trading day.
Exchange-Traded Funds – If taking on all the risk of Forex trading is too extreme for you, consider using ETF’s instead. These investment vehicles trade like stocks and are very liquid, letting you make changes easily. They’re also somewhat diversified, reducing risk while still giving you exposure to the foreign currency of your choosing.
Foreign Companies – Finally, you can get exposure to foreign currencies by investing in companies that operate overseas. Because their profits are calculated in their local currency, you can take advantage of arbitrage opportunities. When those profits are translated into U.S. dollars, you could see additional gains due to relative currencies value fluctuations.
As with all other investments, foreign currencies are inherently risky. Investors should be aware of what macroeconomic factors influence currency values and understand the relationship between them and interest rates before investing. Government policies can also impact currency valuations, since they’re the basis of export and import trade. Investors should make sure that their entire portfolio is diversified in order to avoid unexpected losses.