By far the world’s largest trading market is the foreign exchange market. Speculators account for only a small fraction of spot (cash market) and futures (futures market) foreign exchange transactions. So if you are thinking of speculating in this area, be aware that you are trying to anticipate the brightest minds and supercomputers at the big banks and hedge funds and the political whims and interests of government treasury departments.
The common portfolio used for holding foreign currencies is to hedge against the fall of your currency. For most people, their salaries and all their assets are based on their home currency – and if that value falls, so does their entire net worth and future earnings. To take an example for Americans, there has been a growing trade deficit with China for years. And if China allows its currency to float, the US dollar will fall against the Chinese yuan in line with this trade deficit.
You can also include currency trading as an additional way to diversify your portfolio. I read many books to learn about currency trading and even day-traded Swiss-Franc for six months. If you want to learn how to speculate with currency trading, you can try some technical analysis services from the link below or do a Ph.D. in economics and finance, but I cannot guarantee that this will increase your chances of success.
I made my only ‘very poor man’ currency trade in 2002 before the Euro currency was established. As I was driving in my car, I heard on the radio a speech by the German President that I was certain would cause a short-term decline in the Deutsche Mark. I drove to the nearest AAA Travel Office and withdrew $200 in cash from the ATM next door to put in my pocket.
As an AAA member, I exchanged the $200 for American Express Travelers Cheques in Deutsche Marks. Four months later, the US dollar had appreciated 10% against the Deutsche Mark. So I took my German Mark checks to convert them back to dollars and cash them at a huge profit. To my disappointment, the fees for the trades came to about 8%, leaving me with a huge profit of $4. So if you want to try the “Travelers Cheque” route, you’ll need a big train to offset your trading fees.
The next step up in initial cost is an ETF based on the Euro with the symbol FXE. It is technically a trust, but it trades just like a stock and fluctuates very close to the USD/Euro exchange rate. When you think the dollar will fall against the Euro, buy some of these shares to offset your currency risk and you can start with one share for less than $200.
The next way to access foreign currencies is to buy FDIC-insured certificates of deposit from Everbank.com. They offer CDs in more than 10 different foreign currencies and several indices, and the minimum investment for an interest-earning account is just $10,000. So if you’re tired of your bank’s low savings account rate, there are currencies that regularly offer higher returns without unnecessary exchange rate risk.
Once you can afford to take a few small steps into foreign currency investments, anything dollar-based will seem disappointingly tame. Plus, you’ll have bragging rights to your sophisticated investment portfolio with friends and at your dinner parties.