Riding With The Currency

When the dollar loses value in the world markets, there are pitfalls to watch out for. Here's how to benefit whether it is weak or strong.

program, he became keenly aware of the effect currency values had on his wallet.

“When I was in Jakarta in 1999, they were in the midst of their currency crisis. So the rupiah [Indonesian currency] was cheap to buy. As a tourist, I could buy almost anything I wanted. I could live like a king,” Anderson says. For example, he stayed at a five-star hotel for $45 a night, hired a chauffeur several times during his stay at $15 per day, and purchased a custom-made suit for about $400. “So when I began thinking about going to Europe for my honeymoon, I didn’t want the reverse to happen to me,” Anderson says. “I didn’t want the euro to suck me dry.”

When Anderson began researching his trip in the summer of 2002, the dollar had been on a steady decline against the euro. In May 2002, investors paid 89 cents per euro. Three months later, one euro costs $1.02 — a 12% drop. Anderson, who pays close attention to the news and economic reports, became concerned about exceeding his budget and took action. “I said, wait a minute. If I have a $5,000 budget and the dollar drops another 10% against the euro, that’s an extra $500 it’ll cost me. So I wanted to lock in my costs as soon as [I] could.”

In February 2003, six months before his trip, Anderson paid for hotels, car rentals, and travel packages. By that time, the dollar had fallen an additional 4.9%. Anderson was wise to buy sooner versus later. Given the rapid rate of the dollar’s decline, what would have cost $89 in May 2002 would have been $119 by June 2003. By purchasing early, he saved more than 34% on the cost of the trip.

But a weak dollar isn’t bad news for everyone. It’s a boost to American industries since it makes American products cheaper abroad. This increases demand for those products and can potentially lower the trade deficit. It can also mean strong returns for U.S. investors with international assets. According to Morningstar, the one-year average return for international stock funds for the week ending Sept. 10, 2004, was 17.85% compared to an average return of 11% for domestic stock funds.

George Stein, an analyst at the Chicago Mercantile Exchange, says investors should move money into foreign bonds or stocks when the dollar is weak because there is the possibility of receiving a “double punch.” Stein explains, “On Sept. 1, 2003, a U.S. investor could have bought euro currency at $1.09 and invested the proceeds in an index of European stocks such as the German DAX. Because the DAX increased in value over the year, by Sept. 1, 2004, a U.S. investor could have sold the index and realized a return of 8.5%.” That would be the first punch — equity appreciation.

“Since the dollar continued to decline against the euro during this same time period, the U.S. investor could have converted his euro currency back into dollars at a cost of $1.20. This conversion

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