I’m a foreign currency guy and a commodities guy. Why? They are both anti-dollar plays. In other words, as the dollar goes down over time, these other assets go up against the dollar.
However, in the last couple of years, a currency war has broken out, even though central bankers will rarely admit it.
These days, most of the major industrialized countries are battling each other to the bottom. By that, I mean they are in a race to cheapen their currency more so than the next guy. Why? Growth in many of these countries is stagnant, and one way to try to boost growth is to attract capital into your country by boosting your exports.
But foreigners won’t want your exports if they feel they are expensive. So what can a country do about that? They can push their currency lower in the hopes of boosting their exports.
Well, the next country wants the same thing. So they cheapen their currency further so that their exports look attractive too. As countries get into this game, it kicks off a currency war where the way they seem to “win” is by being the one that cheapens their currency the most. That’s a dangerous game because while they’re doing that, they’re watering down the purchasing power of their citizens.
Most of the major countries are playing this game right now. So as that happens, it may not be prudent to put your money into those currencies because they may not fall against the dollar as good as they should.
Which major countries are playing in the currency war? The United States (USD), Japan (JPY), the United Kingdom (GBP) and Switzerland (CHF).
For now, Europe’s euro (EUR) appears to be on the sidelines. It’s probably a better place to be than dollars is. However, there are some countries that are definitely NOT cheapening their currencies right now.
Which ones are they?
(AUD) continues to remain strong. Since it’s got the highest interest rate (3 percent) in the industrialized world, it continues to attract a lot of capital, which keeps the Aussie dollar buoyed. Additionally, a higher Aussie dollar helps to fend off inflation.
(SGD) continues to strengthen as well. Instead of raising interest rates to fight inflation, the monetary authority lets the currency appreciate in order to fend off inflation. Inflation is on the high side of what they’re comfortable with, so the SGD will remain well-supported.
(NOK) continues to hold up rather well because it’s the most fundamentally sound country in the world, in my opinion. Even though the population is only about the size of the Dallas/Ft. Worth area that I live in, their country is rich in oil and natural gas. In fact, it’s the fifth largest oil exporter in the world and the third largest gas exporter in the world. They’ve used part of the profits from these resources to fully fund pensions for every man, woman and child within their nation. In fact, they have enough funding for the generations to come too. Of all of the currencies of the world, this one is very likely the most fundamentally sound.
Some runner-ups to this list would be New Zealand’s dollar
(NZD). It’s appreciating even at a faster pace than the Australian dollar is but occasionally their central bank has been known to intervene in their currency to weaken it, even though it only has temporal effects on the currency. But that’s what makes it a runner-up.
Another runner up is the Chinese yuan
(CNY), also known as the renminbi. Why only a runner-up? The yuan is not fully tradable yet in the open market and there are limits to how much physical currency can be obtained by foreigners at any one time. That’s the only thing that makes it a runner-up. Other than that, it’s got a lot going for it. China’s gross domestic product growth is astounding at 7.9 percent growth per year. It’s got a trade surplus and has huge stockpiles of commodities as well.
So if you’re looking for places to put your money, use this as a general road map to help you out. You don’t have to start a foreign bank account to gain exposure to these currencies. You can own foreign currency certificates of deposit or have deposit accounts denominated in these currencies through Everbank right here in the United States.
Additionally, most of these currencies can be traded within the forex market through a forex account (although that is the most aggressive way to gain exposure to foreign currencies).
If you’d like a simple way to get started right through your U.S. stock brokerage account, then look into the Currency Shares Australian Dollar Trust (NYSE: FXA) exchange-traded fund.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
© 2013 Moneynews. All rights reserved.