The U.S. dollar is history. Chinese yuan poised to become world's go-to currency.
It wasn't long ago that headlines like these were the norm. If you weren't a dollar basher, you weren't cool. Pundits across the financial spectrum were writing off the greenback due to the huge Obama deficits, the continued printing of money, rising commodity prices and the fact that the rest of the world was catching up to America.
Well, what a difference eight months makes.
Throw in a European debt crisis and all of the sudden the greenback is once again king currency. The dollar has moved up by 14 percent against the euro, 8% against the Australian dollar (though it was 15% up a few months ago), and even against our beloved Israeli shekel it has rocketed up by 13% in the last six months.
Does this upswing portend a bigger trend, or is the move destined to be short-lived? There is no real way to answer that question.
My mother used to be fond of saying that “prophecy was given to fools.” Trying to predict currency behavior over the short term is near impossible.
What I can say is that many of the reasons that analysts were anti-dollar still hold true today. If the world can get past the European debacle, and some normalcy and calm return to the markets, it wouldn’t be a surprise to see another round of dollar weakness.
What should we do?
For investors who need some more income to meet their retirement goals, or who are looking to diversify the fixed-income part of their portfolios, it may be time to start thinking global. The fact of the matter is that interest rates in the U.S. are at historically low levels, and the Federal Reserve has come out and said it is in no hurry to change that.
For fixed-income investors, the 1%-2.5% that bonds are yielding doesn’t cut it. To generate much-needed income, investors have turned to high-yielding, dividend-paying stocks that, despite their current popularity, are ultimately stocks and can get crushed like any other stock [e.g., Citigroup (C), General Electric (GE) et al.]
As such, investors may want to take advantage of cheap currencies and higher yields. If a 2% return is not enough to meet your needs, take a look at bonds that trade in foreign currency. While it used to be difficult to buy these bonds, nowadays most brokerage firms have the ability to purchase bonds in various currencies.
For example, a highly rated (AAA) bond in Brazilian reals can yield over 8%. A similar bond in Australian dollars will be over 4.5%. What makes these bonds even more attractive is that the currencies have been weak of late against the U.S. dollar; not only do you get the high interest rate, you also have the potential to profit from the appreciation in the currency if some normalcy returns to the market.
If you can get a 5%-8% interest rate and a stable currency, you are way ahead of the game and will be able to meet your retirement goals with even less than $1 million in the bank.
For investors who want this exposure but are gun-shy about actually buying foreign-currency bonds, there are plenty of ETFs out there that can do the job. The iShares S&P/Citigroup International Treasury Bond Fund (IGOV) or the iShares JPMorgan USD Emerging Markets Bond Fund (EMB) are both worth looking at.
Global bond funds
For investors who would rather not speculate in specific currencies, but would prefer professional management as opposed to the more-passive ETFs, one can invest in a global or an emerging market bond fund. This is a managed portfolio of bonds that are denominated in multiple currencies. The advantage of this route is that there is a paid manager who is an expert in currencies who manages the portfolio for you. In addition, since it’s a bond portfolio, you also get monthly interest payments. However, be aware that a fund like this can also lose money and is not guaranteed.
It is important to note that past performance is no indication of future results, and with both of these options, if the U.S. dollar gets stronger against the world’s major currencies, you can end up losing money. I am not saying to put all of your net worth in these types of currencies, but some exposure can potentially make a big difference in your retirement.
Speak to your financial adviser to see if you can enhance retirement income by incorporating foreign bonds into your portfolio.
Disclosure: While I don't own these ETFs, I do use them in portfolios that I advise my clients on.