YOUR MONEY-Cash Out: why some investors hold foreign currencies

Reuters

By Chris Taylor

NEW YORK, Oct 21 (Reuters) - You've heard of DoomsdayPreppers: folks who think cataclysmic events are on the way, andwho want to be prepared by stockpiling resources.

Now meet the Currency Preppers.

With government dysfunction on full display in Washington,and the Federal Reserve continuing its policy of bond buyingknown as quantitative easing, some investors are feeling highlyunsettled about the future of the U.S. dollar, which hiteight-and-a-half month lows on Friday against the euro and a basket of foreign currencies. So much so, they havedecided to hold some cash in foreign currencies.

Investors like Bernie Koerselman. The 78-year-old fromSurprise, Arizona has an Australian dollar depositaccount with Jacksonville, Florida-based EverBank, andin the past has owned currencies like the Brazilian real and the Canadian dollar.

"I think it's inevitable the U.S. dollar is going todepreciate significantly in value," Koerselman says. "We'reprinting money like there's no tomorrow, and we're losing ourstatus as the world's reserve currency. I don't see any wayout."

Koerselman isn't alone in keeping a little cash in foreigndenominations. According to Chicago-based research firmMorningstar, investors hold roughly $3.3 billion incurrency exchange-traded funds - about $2 billion of that insingle-currency products, and the rest in baskets of multiplecurrencies.

Among those with the biggest year-to-date inflows: theCurrencyShares Japanese Yen Trust, and the MarketVectors Indian Rupee/USD exchange-traded note.

The top currency for deposit accounts at EverBank, whichoffers CDs and deposit accounts in a variety of foreigncurrencies: the Chinese renminbi, perhaps revealing investorsentiment about where the world is headed. The champ forCertificates of Deposit (CDs): the Australian dollar.

Another popular EverBank product is its CD basket ofcurrencies from commodity-rich countries, consisting of thedollars from Australia, Canada and New Zealand, along with theSouth African rand.

"The majority of our clients have a negative view of theU.S. dollar," says Chris Gaffney, senior vice president ofEverBank's world markets division.

"Investors are worried about default, or about debt levelsand the amount of money in circulation, or about something elsetaking over as the world's reserve currency," Gaffney says. "Butno matter what your views of the dollar, you should bediversified, and not hold all your investments in one currency."

After all, central banks around the world holdforeign-exchange reserves as a matter of course. After thegreenback, the world's central banks are holding euros, Britishpounds, Japanese yen and Canadian dollars, in that order.

EverBank's Gaffney suggests holding between 10 to 20 percentof one's portfolio in non-USD-denominated assets. The averagesum that EverBank clients allot for foreign-currency CDs anddeposit accounts: $40,000.

Another attraction of foreign-currency CDs is their yield,typically much higher than anything that can be found in U.S.bank products at the moment. EverBank is offering 5.75 percentinterest on a three-month CD for the Brazilian real, forinstance.

It's one thing, though, to set a little money aside inforeign currency if you are truly worried about the future ofthe U.S. dollar and such a move gives you peace of mind. It'sanother thing to bet big on currency fluctuations, which can behighly volatile and subject to forces beyond your control.

"It's a tricky business," says Javier Paz, senior analystfor the wealth management practice of the Boston-based advisoryfirm Aite Group and author of "The Forex Trading Manual". "Thethemes that lead someone to hold exposure to one currency paircan change after a few weeks or months, because central banksare intervening indirectly in how FX markets are functioning."

You can deal with currency concerns in other, safer ways,suggests Rick Ferri, author of "All About Asset Allocation" andhead of the financial advisory firm Portfolio Solutions in Troy,Michigan.

"My preference for holding foreign currency is throughinternational equity index funds, like the Vanguard TotalInternational Stock Index fund," Ferri says. "They areprobably the lowest-cost and most efficient way to hedge againsta decline in the U.S. dollar, without giving up equity exposure.

Using currency ETFs or other means is costly and lesseffective for long-term investors, Ferri adds: "The products aredesigned for currency speculation, which is something that wiseinvestors know to avoid."

In fact, Bernie Koerselman does deploy foreign equities asyet another hedge - in particular Canadian stocks, which he seesas relatively conservative and high-yielding. But he also enjoyshaving a little foreign cash on hand, in case the U.S. dollarreally takes it on the nose.

"Most investors have no comprehension of using othercurrencies as a hedge, and have never even heard of it,"Koerselman says. "But at this point I don't think we can avoid adevalued dollar. It may take some years yet - but I'm patient."

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