Consumers, Investors Can Cash In on Falling Dollar

Thursday, 21 Oct 2010 01:07 AM

 

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The value of the dollar against other world currencies will be front and center as the Group of 20 finance ministers gather this weekend in South Korea. But the greenback’s recent precipitous decline has already rattled markets and consumers, who worry that they’ll pay more for everything from their wine to their mutual funds to their summer vacations.

In early June, it took $1.20 to buy a euro; now it takes $1.39. For years, one dollar would buy roughly 6.8 Chinese yuan; now it buys just 6.65 yuan. That’s got to cost shoppers, right? Here’s how you might pay (or could profit) from the dollar’s drop.

Consumers could end up paying a lot, especially if they drive. That’s because oil prices tend to rise whenever the dollar falls. Gasoline prices rose 10.5 cents a gallon in the last month to $2.831 a gallon for regular fuel, according to the American Automobile Association. That’s 25.4 cents higher than it was a year ago. Prices on all imports from Swiss chocolate to Japanese cars can be expected to rise when the dollar falls. The prices on American-made goods could rise too; many of them are made with foreign parts.

Investors could profit as the dollar falls, suggests Tom Roseen, a senior analyst with Lipper, the mutual fund research unit of Thomson Reuters. Anyone who already had money in a European fund has seen the value of their investment rise as the dollar declined – roughly 7.1 percent just since the beginning of October. Investors who buy foreign funds with a strong dollar and then sell their investments after the dollar weakens profit from the currency conversion.

Investors who are still looking to make money going forward can “play” the declining dollar by putting some money into stocks and bonds that offer income denominated in non-dollar currencies. For example, European companies that pay big dividends denominated in euros might pay off big when those dividends are converted into dollars. The same strategy could work on foreign bonds paying higher-than-U.S. interest in euros, says Roseen. Other investments that might perform well if the dollar were to stay weak (or decline further) would include international real estate investment trusts and big U.S. based multinationals: They’ll be able to export more as U.S. goods get cheaper.

Investors who put money in these sectors through mutual funds have to make sure the funds they buy don’t hedge their currencies; if they do, that would eliminate profiting from that falling dollar. Most international funds don’t hedge on a regular basis, says Roseen. Pimco Funds often give investors a choice of whether they want a hedged or unhedged version.

Travelers can still find deals, as long as they avoid Europe. Head south, counsels Tim Leffel, editor of the Cheapest Destinations Blog. He’s actually living in Mexico this year where he’s getting 12.5 pesos to the dollar, up from the typical 10 or 11 pesos to the dollar. Most of Latin America — either officially or unofficially — peg their currencies to the dollar, so when the dollar falls on world markets, it continues to buy the same amount in most of Latin America.

For more big bargains, take your greenbacks to southeast Asia, says Leffel. “They are such a deal anyway if you’re travelling with dollars, it’s not going to make a big difference if the dollar gets weaker,” he says. “In Bangkok, you can still get a four-star hotel that will be nice for under $100, and it’s hard to spend more than $20 for a meal even if you’re eating in good restaurants.”

If you’re determined to go to Europe, go to eastern European countries that have lower-cost economies, such as the Czech Republic, Hungary or Romania. And if you’re heading to a place where the dollars are losing ground by the day (think France, Italy and other tasty places), go to the countryside. You’ll still pay a premium for your euros, but the prices won’t be as high as they are in the big cities of Rome and Paris, says Leffel. You can go back and check out those top cities when the dollar rises again.

© 2014 Thomson/Reuters. All rights reserved.

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