Investing in currencies can be tempting but risky

With the sharp decline in the euro recently, a colleague wondered if now is the right time to invest in the currency. Given the rule of thumb in investing to "buy low and sell high," it's an interesting question. A few months ago, it took more th...

With the sharp decline in the euro recently, a colleague wondered if now is the right time to invest in the currency.

Given the rule of thumb in investing to "buy low and sell high," it's an interesting question.

A few months ago, it took more than $1.50 to buy one euro, and it fell below $1.20 recently. But finding the right time to "buy low" can be more difficult than it seems. Although the euro has fallen dramatically, many analysts say it will continue to be dragged down by debt problems in countries such as Spain and Greece. Some are predicting that by year-end, the euro will be worth $1.

If that happens, you would lose about 16 percent on a euro purchased at $1.20. Of course, forecasts vary. But Jack Ablin, chief investment officer for Harris Private Bank, said he would discourage people from taking a chance.

"Currency markets are dominated by sophisticated players who can change their minds on a moment's notice," he said. That means you could lose money quickly on an economic or political event.


"All it takes, for example, would be for the Chinese to change a strategy on something you never heard about," Ablin said.

In addition, despite the plunge in the euro, it's still not cheap based on its purchasing power, Ablin said. If the dollar and euro were equal, something purchased in Europe would cost about 5 to 10 percent more than an identical item in the U.S.

But here are some considerations for people interested in currency speculation:

BUYING EXCHANGE-TRADED FUNDS: The CurrencyShares Euro Trust exchange-traded fund, identified with the ticker symbol FXE, is designed to track the price of the euro and is easy to buy through a stockbroker. But because investors would lose money if the downward trend continues, Tom Lydon, editor of ETF Trends (, suggests the opposite bet: He'd select the PowerShares DB U.S. Dollar Index Bullish (UUP), a bet that the dollar will keep rising for the time being.

Neither fund is for the buy-and-hold investor, because momentum can turn quickly in currencies. Lydon suggests a tool on his site that tracks the 200-day moving average of an ETF. When the price goes above the 200-day moving average, that's a sign to buy, and when it falls below the average, it's time to sell. But that still doesn't necessarily protect you from losing money.

BUYING EUROS OR A FOREIGN CURRENCY CD: You can purchase euros from large banks, and an investor can buy FDIC-insured CDs based in foreign currencies for as little as $10,000 from EverBank. These CDs pay interest, and, at the same time, you receive the benefit or disadvantage of currency fluctuations.

If you had bought a CD in euros at the beginning of this year, you would have lost about 16 percent of your money through mid-June, while gaining about an eighth of a percent in interest, said Chris Gaffney, vice president of world markets for EverBank. In addition, there are fees: 0.75 percent of the CD when you buy it, and another 0.75 percent when you remove your money.

CDs tie up your money for a set period, and what appears to be a no-brainer can change fast. Late last year, many people bought Australian and Brazilian CDs and bonds because they were worried about the weakening dollar. Then, when Europe's debt crisis surfaced, nervous investors around the world wanted the safety of dollars, and that popularity pushed the dollar's value higher. People who invested in Australian or Brazilian currencies have lost money.


BUYING STOCKS: A less complicated way to obtain currency exposure is to buy stocks of companies throughout the world. Currently, U.S. investors can miss out on gains when they buy European stocks, because the money they make abroad in euros is then converted back into stronger dollars. But Ablin said that given the pressures of the continent's debt crisis, European stocks will become inexpensive and an attractive buy.

He said that's at least a couple of quarters away, however. For now, he favors putting money into stocks from the U.S., which is stronger economically and has the advantage of the dollar. When Europe is worth buying, Ablin said, investors could invest in the SPDR STOXX Europe 50 exchange-traded fund (FEU) or the MSCI EAFE fund (EFA).

Keep in mind when buying a European fund that BP PLC, which is embroiled in the Gulf of Mexico oil spill, is often a top holding, along with European banks that might lose money in the debt crisis.

What To Read Next
Get Local