Investing in different currencies is an excellent way to diversify your investment portfolio in the foreign exchange market. Currency investments carry big risks. As a multinational investor, you need to know the strategies that can safeguard your assets.
In this guide, we’ll look at the investment options to consider when planning to invest in different currencies. We’ll also show you how to capitalize on exchange rate fluctuations through various investments. So, keep reading and learn how to maximize your profits.
Best Strategies for Investing in Different Currencies
Investing in currencies has become exceptionally popular due to its liquidity. Luckily, there are many ways for trading currencies, with the foreign exchange market (forex) being the most popular one. Here are the other options for trading foreign currencies.
· Foreign currency certificates of deposit (CDs)
· Exchange-traded funds (ETFs)
· Multinational corporations
· Foreign bond funds
Now, let’s look at how you can maximize profits using these financial instruments.
- Foreign Exchange Market (Forex)
You can directly trade currencies from various parts of the world by opening a standard forex trading account with a reputable broker. If you are Canadian planning to invest in the U.S. currency, consider selecting a broker with the CAD to USD currency pair.
It’s important to note that the foreign exchange market operates differently from the stock exchange market. For instance, forex has no central clearinghouse for trades like the stock market. Besides, there’s no regulated currency exchange in the forex market.
Another difference is that currency dealers make money based on the bid-ask spread , and not by charging commissions like in the stocks market. One more thing that makes the forex market more reliable is that it allows investors to diversify their investments. - Foreign Currency Certificates of Deposit (CDs)
Some financial institutions provide foreign currency CDs that allow investors to earn interests in other countries based on local rates. Thankfully, you can find a basket CD with different foreign currencies. However, the CDs have no guaranteed APY.
When you invest in foreign currency CDs, you’ll get a foreign currency account that allows you to transfer money between major currencies, such as U.S. dollars, British pounds, and euros. So, CDs are subject to fluctuation in exchange rates.
What makes the CDs more profitable is that they feature higher interest rates than conventional CDs (dollar-denominated). When your CD matures, you’ll convert it back to U.S. dollars. You’ll make profits if the dollar strengthens against a foreign currency. - Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are also great investment options for trading in foreign currencies. You don’t need to trade the forex when investing in currencies using ETFs. The ETFs can buy and manage a portfolio of foreign currencies on your behalf.
Notably, you can make the purchases through traditional stockbrokers instead of foreign exchange brokers. You won’t have many leverage-related risks. Thankfully, many ETFs provide investments in foreign currencies, including:
· WisdomTree Dreyfus Emerging Currency Fund (CEW)
· CurrencyShares Canadian Dollar Trust (FXC)
· CurrencyShares Australian Dollar Trust (FXA)
· CurrencyShares Swiss Franc Trust (FXF)
· WisdomTree Dreyfus Chinese Yuan Strategy Fund (CYB)
Before investing in any of these ETFs, you must carefully read their prospectus and understand their terms and conditions, including the fees charged. Try to find as much information as possible before committing to the ETFs. - Multinational Corporations
You can indirectly participate in foreign currency markets by investing in multinational corporations. Such companies extend their business operations in foreign countries. So, they have to sell and buy foreign currencies as part of their operations.
The revenues and profits realized from the operations overseas will boost if the foreign currencies appreciate the dollar. That’s because the multinational company will have to convert the gains to dollars for financial reporting.
The bottom line is that multinational corporations are vulnerable to currency exchange risks. If the foreign currency is stronger, the company will make more money during an exchange. Conversely, a weaker foreign currency will yield a few dollars in exchange. - Foreign Bond Funds
Did you know that some mutual funds have invested in foreign government bonds? The investment accrues interest denominated in the foreign currency. If the foreign currency becomes stronger, it will yield high interest if converted to the local currency.
So, what are some of the popular foreign bond funds to consider? They include:
· PIMCO International Bond Fund (PFORX)
· Goldman Sachs Emerging Markets Debt Fund (GSDIX)
· PIMCO Emerging Markets Local Currency and Bond Fund (PELBX)
· GMO Emerging Country Debt Fund (GMCDX)
· T. Rowe Institutional Emerging Markets Bond Fund (PRSNX)
If you plan to invest in the international bond market using these funds, you should first know its risks.
Final Words
Investing in different currencies involves a lot of intricacies. So, you need to be careful when considering investments dealing with foreign currencies. Such investments are subject to currency exchange risks. Thankfully, they offer some level of diversification
