How to Profit from Current Dollar Anxiety

Includes: AWF, BNA, ESD, RCS, TEI
by: Neil George

Is the dollar in as much trouble as the pundits say? A better question to ask is whether it matters - and how we can profit regardless.

It seems that nearly every pundit out there is telling tales of woe and despair over the crumbling dollar against the globe's currencies. Ok, the headlines are proclaiming that the dollar has been plunging - but let's look at the details behind the headlines.

Misleading Dollar Measurements

And the key thing to look at is what folks are using as a measurement of the dollar's value. This comes down to two indexes. The first is the dollar index which is a composite of the six traded currencies on the US listed futures market: the Canadian dollar (CAD), Swiss franc (CHF), Swedish krona (SEK), euro (EUR), British pound (GBP) and Japanese yen (JPY).

The second is the trade-weighted dollar index that was created by the US Fed, which includes the above six currencies along with the Australian dollar (AUD).

There's a problem with both measurements: Neither includes the dollar's movements against some of the US's largest trading and investment partners' currencies, which of course include Mexico and its peso (MXN) and China - along with Hong Kong (CNY & HKD).

And the picture gets even muddier when you look at the weightings within both indexes - especially the dollar index, which is dominated by the euro with its 57 plus percent weighting.

Why is this important? Simple: because while it might make for great press - the hype of doom and gloom - you as an investor can't afford to let hype guide your decisions.

Instead, let's look at the facts of what's really going on with the dollar.

So far this year, the dollar has indeed given up some value - but not as much as you might have been led to believe. Against the Chinese renminbi - the dollar is down a mere 0.2 percent and against the additional Chinese currency - the Hong Kong dollar - it's flat as a won ton.

Next, against the other major Asian power - Japan - the dollar is down only 2.5 percent.

Heading over to Europe, the dollar is down 4.1 percent against the Swiss franc and 5.8 percent against the euro.

Back in North America, the dollar is down against the Mexican peso by 3.1 percent and the Canadian dollar by a bit more than 15 percent - but that's after the dollar had soared by a similar amount in the 4th quarter of last year.

Actual Market Performance vs. Dollar Demise Hype

So as you can see, the case for dollar doom appears a bit less than recent headlines make it out to be. But let's dig a bit further and look at the real impacts of what's going on behind the scenes of the currency market.

Pundits like to talk about dollar ruination as it affects trade, commerce and investment flows. The idea is that with the end of the dollar, our trade will collapse and the world will simply stop selling to, financing, and investing in us.

Well, if indeed the dollar were dropping like an Acme anvil in a Warner-Brothers cartoon, we should be seeing the real world impacts on the flows of trade and investment - right?'s not showing up.

Sales of goods and services to the US from our major trade partners keep climbing - even with most of the world in crummy economic shape. The biggest seller - China including Hong Kong - has been increasing sales to the US by some 7 percent in the last reported monthly data, amounting to near 26 billion. The European Union came in with gains of 8 percent to 25 billion. Japan sold more by some 4 plus percent at 8 billion. And back in North America, both Mexico and Canada saw gains amounting to 14 plus and 18 plus billion respectively.

Meanwhile, it you look at our sales to those same countries, we sold less - slipping by 2 plus percent on average.

We keep buying and they keep selling.

More importantly, the world keeps financing and investing in the US markets. The Fed tracks the transactions month by month as it watches all of the markets for bonds, stocks and other securities that go in and out of the US via all of the listed and over-the-counter markets.

And during the past 10 years the gains have kept coming - meaning that the world keeps sending its savings and investments flowing at an ever-greater pace into the US market, currently running at an increase of over 44 percent - and that's even with our regular bubble and collapse cycles.

And so far this year - as the dollar is supposed to doom us and our markets - the inflows of capital from outside the US are soaring even higher by more than 96 percent.

And this despite the so-called trade-weighted dollar index being down some 12 percent for the past 10 years and down 2.8 percent year to date.

So, if the dollar's demise is supposed to crush our markets - no one told the guys that actually do the heavy lifting when it comes to real buying and selling, and not just hyperbole.

And for those who are touting that the dollar's doom will bring inflation - citing the real goods markets of commodities as a yardstick - it's not showing up. For the past year, the Commodities Research Board's CRB index of commodities is down more than 15 percent and even crude oil is down over 19 percent.

The Best Way to Profit from Currencies

Now that I've gone through the real numbers behind the hyped headlines - let's consider the profits that you can make by the boatload in the currency markets.

The key to currencies isn't to get all clutched up about what's going wrong - but instead focus on what's going right - and where. The winners in the currency market won't be those that hope for a collapse of the US, but rather focus on the winning strategies of individual countries and markets.

I know first hand about how to invest on currency movements - as it was the core of my livelihood spanning over two decades, before my current career as a writer.

Back then, there was the same group of suspects who were always out there bashing the dollar. The stories and the pontifications were the same as today, and I was only too keen to get my share of the business that would be driven to my banks and trading desks as well as my managed accounts.

But while I was happy to accept orders - I felt it my obligation as well as good business to educate clients that they didn't have to rely on shorting the dollar to hedge their portfolios, their savings and their retirement plans. I showed them how the world offered many ways, irrespective of the dollar's movements, to generate even greater returns.

And along the way - they could also get paid a whole lot more yield from markets and currencies around the world that were advancing on positive market and economic developments rather than just reflexive trading.

Now that I'm an investment and market analyst and writer, I continue to offer similar strategies: buying into foreign markets not because of doom and gloom stories about the US, but rather because of great stories of improvements abroad.

This is what's behind my core investments that I've been making for years and years in my past, current and - coming soon - pending publications.

I continue to follow and recommend five core closed-end global bond funds that invest in currencies and markets around the globe, offering better yields and better market returns beyond just the US and the US dollar.

They're working now and they keep working year after year - regardless of whether the dollar indexes go up, down or nowhere.

They include the AllianceBernstein Global High Income (NYSE: AWF), the Blackrock Income Opportunity (NYSE: BNA), Pimco Strategic Global (NYSE: RCS), Templeton Emerging Markets (NYSE: TEI) and the Western Assets Emerging Markets (NYSE: ESD) which merged with Western Assets Emerging Markets Floating Rate - EFL).

So far this year, this set of funds is averaging returns in excess of 53 percent while paying you an average dividend yield of 8 percent. And while the Pimco trades as always at a reported premium - the average for the remaining four funds is running at a 4 percent plus discount of what they're worth at market prices.

The proof is in the numbers. You can fool around with a negative dollar index fund and maybe make something if the gloomers are right - or you can follow my lead and invest in markets and currencies that perform with or without the dollar - your choice.

Disclosures: Long AWF, BNA, RCS, TEI, ESD

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