Multi Currency Diversification with CurrencyShares

by | Jul 28, 2008 | Multi Currency Investing

Multi Currency diversification grows in importance.

The US government recently estimated next year’s deficit to be nearly $500 billion in 2009. The 2008 budget is headed towards $400 billion.

The numbers do not mean a lot. What counts is the amount of debt and deficit in relationship to the economy of the currency’s country.

One of the most important lessons about multi currency investing is to know that large and continuing deficits are a downwards pressure that can cause a currency to fall versus other currencies of countries that do not have large deficits.

Three currency factors have a huge, long term impact on a currency.

#1: Government deficit as a percent of the economy
#2: Current account as a percent of the economy
#3: Interest rate (below I use yields on 10 year government bonds as examples).

There are many other factors to consider, national debt…demographics…potential deficits…inflation…economic growth and how the stock market is doing for a few.

Yet these first three factors are among the most influential and can give us currency parity clues.

Take the following country statistics as an example.

Current    Deficit    Interest
Account     2008       Rate
United States             -4.9%      -2.4%      4.15%
Japan                         +4.1%      -2.9%      1.64%
Britain                        -4.1%      -3.6%      5.04%
Canada                         0.8%       0.2%      3.88%
China                           9.3%       0.4%      4.66%

Japan has a much stronger current account than the United States, but a low interest rate and a bigger government deficit. These forces would suggest a degree of currency stability between the dollar and the yen.

The same review would suggest a weaker British pound and a stronger Canadian dollar and Chinese yuan.

You can see current statistics of 60 countries at the Economist

The numbers suggest that though we may see some dollar upticks…the greenback should long term continue to slide down.

Protection is gained by holding a diversified basket of currencies.

One way to maintain a liquid portfolio of numerous currencies is through Exchange Traded Currency Shares.

These are like exchange traded funds traded on stock exchanges but they invest only in money markets or cash accounts. Typically a money market mutual fund only invests in short term (one day to one year) debt obligations such as Treasury bills, certificates of deposit, and commercial paper. Their main goal is the preservation of principle.

Such shares are a place to park money while waiting to do something else. They can, however, fill a role that most US banks have missed which is to offer a place where you can keep your liquidity between investments in many currencies.  Just like a foreign currency bank account…but it is not.

There are very few US banks that offer accounts in any currency except the US dollar.

One company, Rydex Investments, manages an entire basket of Exchange Traded Currency Shares under the banner of “CurrencyShares.”

Rydex Investments is a US mutual fund manager that manages $14 billion dollars in assets via more than 90 mutual funds and exchange traded products.

Their “CurrencyShares” trusts use Bank of New York as their trustee and JP Morgan as depository.

The have seven CurrencyShares ETFs that track the:

Australian dollar (NYSEArca:FXA)
British pound     (NYSEArca:FXB )
Canadian dollar (NYSEArca:FXC )
Mexican peso    (NYSEArca:FXM -)
Swedish krona   (NYSEArca:FXS )
Swiss franc        (NYSEArca:FXF )
Japanese yen    (NYSEArca:FXY)

The idea is simple. Each share represents ownership in one of seven trusts. The trust holds a bank account in one currency. Each share represents a partial ownership of the interest and money in the account.

All fees are (hopefully) paid for with the interest earned.  The rest of the interest goes into the fund’s asset value.

The shares are traded on the New York stock Exchange Arca (electronic exchange) the same way any ordinary stock does.

The share is typically worth the price of the share as if it were a holding in the foreign currency it represents.

Let’s take an example.  The net asset value of the CurrencyShares Euro Trust on July 25, 2008 was $ 157.28.  The share price was $157.42.

The Euro dollar exchange rate at the same time was 1.57.46.

If the euro were to rise to 1.75 dollars per euro, the share price would rise about that amount (plus any interest after fund costs) as well.

These shares provide an easy and convenient and cost-effective method of gaining investment benefits similar to that of holding foreign currencies since you can trade them through any US stock broker or online.

There are three interesting features that makes these shares better than a bank account.

First, you can sell them short.

Second, you can buy these shares on margin.

Third, you can buy and sell shares of each CurrencyShares Trust continuously throughout the trading day on the NYSE Arca at prices established by the market and place market, limit and stop loss order for the shares of each Trust.

Up next,  Rydex is ready to start “CurrencyShares” trusts for Russian ruble, South African rand, Hong Kong dollar and Singapore dollar.

You can learn how to invest in “CurrencyShares” shares at

The falling dollar, huge US deficits and negative current account all suggest that more currency turmoil is ahead. these facts and today’s global economy makes multi currency investing an important part of every investor’s tactics.

Multi currency Exchange Traded Currency Shares like the MultiCurrency Trusts are one vehicle that can be used by even the smallest investor.


Join me with Jyske Bank to learn more about multi currency investing at our upcoming International Investing and Business Made EZ course in
North Carolina October 3-5, 2008.

Or join us in Ecuador International Investing and Business Made
EZ Ecuador November 7-9, 2008

Stay on in Ecuador for November’s discounted real estate tours.