In Euros We Trust

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 |  Includes: AGG, FXE
by: Gary Gordon

The Fed is very likely to cut rates. And the stock market tends to celebrate a stimulus to the U.S. economy.

That said, a long campaign of rate-cutting is usually undertaken to fight off a recession. And stocks do not welcome negative growth with open arms.

(Therefore, uncertainty about the effects of housing on overall U.S. economic growth and consumer spending make stocks a near-term question mark.)

Treasuries, and bonds at large, do well as rates ease. You get capital appreciation from the higher-yielding bonds that you currently own, even though yields on new issues begin to drop.

So, for example, the 5% annual yield that the iShares Lehman Aggregate Bond Index (NYSEARCA:AGG) had provided may fall to 4%, though you could pick up an additional 5% or more in appreciation. (It's not often that you can say that you're getting 9% per year on high-grade bond holdings.)

I believe AGG will be a strong position over the next year. However, it still does not approach the sure-fire status of exchange-traded currency investments.

In truth, I've heard a lot of mumbling and complaining about the .40% annual expense levied by the Rydex Currency Share Euro (NYSEARCA:FXE). Yet I've yet to see anyone come out against investing in the Euro in one form or another. (And quite frankly, if you're not going to open a FOREX currency trading account, Rydex is offering exposure to the Euro that you may very well need.)

Why the Euro? U.S. interest rates have to be cut to deal with the negative effects of real estate; they may even have to be cut significantly to prop up consumers/homeowners/employees. When rates are being lowered, the currency of the country lowering its rates loses ground to other countries that are raising rates and/or holding them steady.

The European Central Bank is holding rates steady; it may even raise again soon.

Granted, it is quite possible that, to deal with global credit crunching noise, the European Central Bank would ease as well. Under these circumstances, though, the U.S. Fed may need to be cutting rates even faster.

The bottom line? The Euro has been a solid income generator with relatively low volatility. And the outlook remains quite upbeat over the next 9 months. (10% per year in a currency... pretty nice.)