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MUTUAL FUNDS / RUSS WILES

Some Easy Ways to Bet Against the Dollar

August 23, 1993|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds.

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.

John Callen, branch manager of Fidelity's office in Scottsdale, Ariz., views the foreign stock and bond funds as less volatile in general than the currency portfolios and thus more suitable investments for most people.

"I haven't noticed any uptick in interest in the currency funds lately, but there's definitely more enthusiasm for international investing in general," he says.

The currency funds are essentially ways to protect yourself against U.S. economic problems, some of which are reflected in a weakening dollar.

As an alternative, you can buy currency-based warrants that trade on the American Stock Exchange, or you might consider a foreign-currency certificate of deposit from one of the handful of banks that offer these to smaller investors.

For example, Mark Twain Bank of St. Louis (800-926-4922) sells non-dollar CDs in more than two dozen currencies, including the yen, for investors with $20,000 or more. Unlike a currency mutual fund, the CD pays a fixed rate of interest, although it too would be subject to exchange-rate risk.

The bank expects to unveil a non-dollar money-market product later this year, possibly in minimum denominations as low as $2,500.

Of the factors that cause foreign currencies to strengthen against the greenback, the nation's persistent trade imbalance is an important one. As Americans import more than they export, they effectively must buy yen, marks or whatever to pay for their purchases. This demand tends to boost the value of foreign currencies against the dollar.

The trade gap and chronic federal deficits "show that we, as an economy, are consuming more than we spend, with no willingness to deal with the problem," says Atkinson.

As a consequence, he says, we must either increase our production or lower our standard of living. "The market instrument for doing the latter is an eroding currency."

Yet another factor is inflation-rate differentials among nations, in that low-inflation countries tend to have stronger currencies.

"I don't think people feel the U.S. will contain inflation in the long run as well as Japan or Germany," says Frank Trotter, a vice president in the Capital Markets Group of Mark Twain Bank.

He believes the yen's current rally against the dollar has a ways to go, although it's hard to say how much.

In addition, the continuing economic development of the Pacific Rim, especially China, will add further strength to the yen, Trotter predicts. His reasoning: Japanese firms will disproportionately benefit from East Asian trade and investment, adding support to the country's currency.

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