COLUMN-Betting against the buck easier said than done

Mon Feb 24, 2014 12:57pm EST
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By John Wasik

CHICAGO Feb 24 (Reuters) - The U.S. dollar has been taking it on the chin of late. Last week saw the dollar hit a seven-week low against its rival currency, the euro. The greenback also declined against a basket of major currencies, hitting one of the lowest points of the year to date.

The even worse news is that there's not much anyone can do about it right now. Investors whose assets are denominated in the buck can lose value relative to other currencies, and it's difficult to find reliable vehicles to hedge against the decline.

Some $4 trillion is traded in foreign exchange every day, most of it by institutions. It would be nearly impossible for an individual to have the information or trading capability available that large banks and hedge funds employ.

What would you need to know to profit? A panoply of data goes into real-time currency pricing. You'd have to simultaneously monitor news on central bank policies, inflation, gross domestic product, retail sales, manufacturing and housing prices.

Trying to hedge the decline - if it even becomes a longer-term trend - is nettlesome. Exchange-traded funds that allow you to do this are imperfect vehicles that may not reflect day-to-day sentiment. And you are also paying dearly to invest in them, due to high management expenses, so that means making money in them is difficult.

It's also worth warning that currency markets are notoriously volatile from week to week. Traders are engaged in speculation that could sway the currency's values and give false signals.

"A lot of investors can get away with avoiding currency hedging," says Eric Dutram, an ETF strategist with Zacks Research in Chicago. "A lot of developed market currencies are stable long-term. It's hard to see the value in currency ETFs."

If you're concerned about the dollar's decline because most of your assets are denominated in dollars, here are three strategies you can employ to soften the blow - even if some of the options come with drawbacks:   Continued...