Japan's currency has strengthened so much in the last year that it's likely the dollar will soon be worth less than 100 yen for the first time since World War II.
For American consumers, this means more expensive cars, stereos and tofu. Is there a way to protect yourself against further declines in the dollar?
Yes. Buy a currency fund.
A handful of mutual funds offer pure investments in foreign currencies such as the Japanese yen.
The funds are essentially non-dollar money market portfolios that allow investors to make exchange-rate bets against the greenback. The funds don't include any foreign stock or bond holdings, but they nevertheless can be volatile.
Why would anyone want to invest in such a creature?
For starters, the funds might appeal to people planning trips to Japan or other countries. By denominating some money in the foreign currency, you can essentially hedge against the danger that the greenback might weaken in the meantime--a scenario that would increase your traveling costs.
For much the same reason, small import-export businesses might be interested in such a fund, although larger firms would tend to purchase more sophisticated hedging vehicles such as a futures contract on a currency. But even mainstream investors might consider a currency fund for a portion of their portfolios, as a way to add non-dollar diversification.
"Compared to foreign stock and bond funds, you don't have to take any equity or bond market risk," says James J. Atkinson Jr., senior vice president at Pasadena-based Huntington Advisers, which offers three such funds.
In fact, the currency portfolios rarely move in lock step with other global and international mutual funds, for two reasons.
First, of course, these other funds hold foreign stocks and bonds. Second, they also do at least some hedging in an effort to minimize the exchange-rate dangers. Currency portfolios don't do any hedging, since their whole rationale is to participate in the exchange-rate fluctuations.
To illustrate the differences that are possible, consider that Fidelity's Yen Performance Portfolio, a currency fund, generated a total return of 2.5% in 1992 and was up 20.2% during the first seven months of this year.
By contrast, Fidelity's Japan Fund, which invests in stocks, fell 0.4% last year, then surged 39.3% through July of this year.
