Already depressed by the nation's huge budget and trade deficits, the U.S. dollar is being undermined by American mutual fund investors: More of them are funneling money into foreign stock funds, a shift that hurts the greenback.
Thanks in large part to the dollar's weakness, returns on foreign shares overall have significantly outpaced U.S. market returns since 2002. Foreign stock mutual funds have gained 12% a year, on average, over the last three years, compared with a 4.9% average annual gain for domestic stock funds, according to Morningstar Inc.
That performance edge is proving a big draw for American investors this year.
Net U.S. cash inflows to stock funds that invest overseas soared to a record $79.7 billion in the first 10 months, compared with $47.6 billion for all of 2003, according to estimates from fund tracker Financial Research Corp. in Boston.
A list of the 25 best-selling stock and bond mutual funds of 2004 includes five that primarily invest in foreign securities, Financial Research data show. By contrast, the 25 best-selling funds at this point last year all were domestic portfolios.
For financial advisors, investors' growing interest in foreign securities is a welcome change from the 1990s, when many found it difficult to get clients to diversify away from the then-hot U.S. market.
"They would say, 'Tell me again why I should be in foreign stocks,' " said Craig T. Cross, co-founder of investment advisory firm Halbert Hargrove in Long Beach.
Now, Cross said, "more and more clients" are asking about foreign investing.
That could add to the downward pressure on the U.S. currency's value against the euro, the yen and other major currencies. By investing more in foreign mutual funds, Americans in effect are selling dollars in favor of other currencies.
On their own, those cash flows aren't big enough to make or break the buck, experts say. Still, "they raise the hurdle for the dollar that much higher," said Daniel Katzive, a currency strategist at brokerage firm UBS in Stamford, Conn.
But a weaker dollar is exactly what many investors are betting on. As its value slides, foreign securities can automatically be worth more to U.S. investors.
To illustrate: When one euro was worth 86 U.S. cents in 2002, a European stock priced at 10 euros was worth $8.60 to a U.S. investor. Now, one euro is worth about $1.33. Even if that European stock is still worth just 10 euros in its home market, its value to a U.S. investor is $13.30 -- 55% more than in 2002.
