The Federal Reserve’s misguided insistence on a loose monetary policy, ongoing resistance to government spending cuts, and another increase in the U.S. debt ceiling will all conspire to boost inflationary pressures and restrain the value of the U.S. dollar.
That will, of course, impact domestic market performance and cut into real returns on dollar-denominated investments – but it will also provide major opportunities for U.S. investors who can target issues denominated in the strongest foreign currencies.
Unfortunately, that doesn’t include most of the world’s other major currencies – including the euro, British pound and Japanese yen – since the economies of the underlying nations are also suffering from sluggish economic recoveries and problems with excess debt.
As such, the strongest currencies in 2013 will likely be found to the north and west of the United States, starting with the neighboring Canadian dollar.
The Best Currencies to Invest in for 2013
Canadian Dollar: Martin Hutchinson, Money Morning’s Global Investing Strategist, predicted a strong Canadian currency (CAD) over a year ago and reiterated that advice after a brief U.S. dollar rally sent many currencies to yearly lows in late May and early June. In both instances, he cited three key factors:
- Canada has a sound banking system.
- Its spending is more controlled, resulting in a smaller budget deficit.
- It has a wealth of energy and mineral resources that support the value of the currency.
Those factors contributed to a rise in the Canadian dollar (also referred to as “the Loonie”) from the June low of US$0.9574 (i.e., one Canadian dollar would by US$0.9574) to the recent level of US$1.0158, up from US$0.9816 a year ago. And, since all three positives still apply, a further rise – perhaps to levels above the 2012 high of US$1.0372 – seem quite likely, though gains could be restrained if the U.S. economy slumps again, hurting cross-border trade.
Australian Dollar: Another other resource-driven currency with continued potential in 2013 is the Australian dollar.
Australia has a large in-ground supply of both precious metals and industrial minerals, and the export of both helped drive the Aussie dollar (AUD) from a late May low of US$0.9760 to the current mark of US$1.0517.
That’s up from US$1.0386 at the start of 2012 and, further strength seems likely in 2013 given that the economy of China, Australia’s largest resource customer, has apparently managed a “soft landing” and is expected to rebound in the year ahead.
Chilean Peso: Continuing on resource-driven economies, there’s Chile.
Chile’s resource base is dominated by copper, and a sharp post-disaster reduction in orders from Japan hurt both exports and the value of the peso in 2012.
However, several analysts – including JPMorganChase & Co. (NYSE: JPM) – have predicted copper will be the most in-demand mineral in the year ahead, thanks to improving global growth, and that should push the Chilean peso (CLP) higher from its current level of US$0.00212.
Singapore Dollar: In the Far East, the top currency prospects for 2013 will likely be the Singapore dollar (SGD) and the South Korean won (KRW).
Singapore serves as a major trade gateway to China and the constant flow of foreign currencies through the banking system provides both revenue and a risk-reducing value base. That helped the SGD rise from a June low of US$0.7785 to a recent quote of US$0.8158. That was one of the strongest performances of 2012 and the currency should continue to dominate in 2013 as China’s economy turns higher.
South Korean Won: South Korea’s currency benefits from a strong internal economy and high export demand for its products in the West, as well as its close association to both China and Taiwan. However, it also has a fairly high risk exposure due to the ongoing threat from North Korea, and investors should expect greater-than-average volatility as a result. The won has also risen almost uninterrupted since hitting its 2012 low in early June, so a correction could be overdue.
Chinese Yuan: Longer term, Money Morning Chief Investment Strategist Keith Fitz-Gerald continues to advise maintaining positions denominated in the Chinese yuan (CNY).
After faltering somewhat in the second quarter of 2012, China’s economic numbers have shown improvement in each of the last two quarters and Fitz-Gerald feels that puts China solidly back on track toward “global economic leadership.” He also expects China to continue its efforts to diminish the U.S. dollar’s role as the world’s reserve currency by setting up yuan-denominated swap agreements with major trading partners.
Other Ways to Invest in the Strongest Currencies of 2013
While more aggressive and better-financed investors can take positions in these currencies via the foreign-exchange (Forex) markets or, in some cases, using currency futures or option contracts, average investors are probably better served by either using foreign currency funds or taking stock positions in specific foreign companies.
Exchange-traded funds (ETFs) or notes (ETNs) are available for many of the individual foreign currencies – or for baskets of currencies representing the smaller nations. Some examples include:
- CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC), recent price $101.01.
- CurrencyShares Australian Dollar Trust (NYSEARCA:FXA), recent price $104.40.
- WisdomTree Chinese Yuan ETF (NYSEARCA:CYB), recent price $25.72.
- WisdomTree Dreyfus Emerging Currencies Fund (NYSEARCA:CEW), recent price $21.21.
For those who’d rather just bet against the U.S. dollar as opposed to seeking specific foreign currencies that may do well, an alternate choice is the PowerShares DB US Dollar Index Bearish Fund (NYSEARCA:UDN), recent price $27.28.
Investing in foreign currencies has its risks, but if you believe the current outlook for the U.S. includes continued fiscal disarray and the potential for inflation, it’s an essential step in growing and preserving your wealth in the face of a weakening U.S. dollar.