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Foreign Exchange Rates - Investing in Foreign CurrenciesIn the international foreign exchange markets, relative prices for different currencies are determined by the same forces that determine prices for most goods in capitalist societies - supply and demand. If people want to sell their dollars and buy Euros, the price of the Euro goes up -- ie, if a EURO used to be worth $1, perhaps it will now be worth $1.05. That is the foreign exchange (or FOREX) rate - $1 is worth X amount of Yen or Euros or whatever currency you are comparing it against. The supply and demand variables depend on a lot of things, from trade deficits to inflation to political volatility in a country. Professional currency traders make a living by finding valuation differentials that exist in these markets and buying or selling the affected currencies, hoping to turn a profit in the process. But today, even individual investors can get into the foreign currency market with ease. In this guide, we will take a look at how you can invest in the foreign currency market, and diversify your financial holdings by moving into assets valued in denominations other that US$.
Exchange Rate Listings - Forex TradingWhere can I see the daily exchange rates? How do I know how many Euros I can buy with a dollar? What is a British Pound worth? These are common questions from people outside the realm of professional FOREX traders. Unless you do a lot of international travel, you probably don't care how much your domestic currency is worth relative to some overseas currency. But the foreign exchange rates affect a lot of things, from the price you pay for imported products (electronics, apparel, gas, etc.) to the value of your holdings of international stocks in your retirement plan (a falling dollar makes foreign stocks go up in value). The Internet has made it much easier to get quick currency quotes and exchange rate tables. In the old days, you'd need to look in the Finance section of your newspaper or check with your bank to get exchange rates. But today, you just go online and get any currency rate in a micro second. Go to www.oanda.com/convert/classic for a currency conversion table that covers pretty much all available currencies. Just select the amount and the starting currency, select the currency you want it converted to, and hit the CONVERT NOW button. Whether it is Dutch Guilders or Iceland Kronas, its all here. You can also check out X-rates.com, which includes graphs and information on how much rates have changed over the last week or month to help you spot trends. You can even get foreign exchange rates via text messaging (SMS) on your cellphone from Google. Just send a text message to GOOGL (46645) and they will text you back the currency conversion. For example, send the message "1 euro in dollars" and you get back "Currency Conversion: 1 Euro = 1.3197 U.S. dollars". Pretty neat. Of course, you can get the same information at the actual Google website by putting the same request in the search box, and get the same answer -- try it next time you see a price on a Paris hotel quoted in Euros.Foreign Currency ETF FundsETFs (exchange traded funds) have made it easier for investors to to invest in all kinds things, usually with very low expense ratios. In December of 2005, Rydex launched their first CurrencyShares for Euros, trading under the symbol FXE (the FX stands for foreign exchange). Similar to the gold funds, Euros would be held in a trust at the JP Morgan Chase Bank in London, with each share purchased representing 100 Euros. With a slight twist, the currency would also be held in interest bearing accounts, meaning the funds expense ratio would be paid out of the interest, and any additional interest accrues to the share holders. So why would you want to invest in a Euro ETF? Well, if you think the value of the dollar is going to decline and the value of the Euro is going to increase, you buy some of these shares and they go up in value, and you can later sell them and have more dollars to spend. Pretty simple. Funds like these are a world away from the old school style of investing in foreign exchange futures. They give investors an easy way to diversify beyond stocks and bonds, to take financial positions for opportunities in the currency markets, and they do all this through easy access of a brokerage account. You can learn about the various Rydex funds at CurrencyShares.com. The the popularity of the Euro fund, Rydex also launched a number of other foreign currency investment funds:
Foreign Currency Mutual FundsThere are a couple of mutual funds targeted at the foreign exchange market as well. One is the Franklin Templeton Hard Currency Fund, ticker symbol (ICPHX). As of Sept. 2006, they had holdings in Canadian T-bills, Denmark T-bills, as well as German, Dutch, French, Norwegian, Singaporean, Spanish, and Swedish government bonds. They also held about 1/3 of their assets in short term US T-bills. Another is the Merk Hard Currency Fund (symbol MERKX). The Merk is "a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies." Check out their website at MerkFund.com.
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