Betting On The Buck

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April 15, 2009 4:57pm ETF BASIC NEWS

dollarEven though George Soros is down on the dollar it remains the world’s reserve currency. How to play the greenback.

Though the dollar has strengthened over the past six months against arch rival the euro, George Soros isn’t backing the buck. Soros, one of the world’s foremost currency traders, stated that the dollar remains vulnerable and could be replaced as the world’s reserve currency by a basket of denominations, including the euro, yen and sterling.

Soros added that the world’s financial system needs to be reformed so the dollar is subject to the same discipline imposed on other currencies. If enacted this move would closely resemble a recommendation made by a United Nations study group, which also said that in order to make the globe more stable the world should move to a collection of currencies.

All this may be so, but the Forbes Investor Team is not yet ready to quit on the greenback.

Greg Ghodsi, the head of the 360 Wealth Management Division at Raymond James says that since last fall the dollar has been near the top of all currencies and that he is exposed to it via exchange-traded funds (ETFs). Specifically he uses the PowerShares DB U.S. Dollar Index Bullish Fund (NYSE: UUP), which tracks the buck. He added that the dollar became more attractive last summer, when commodities prices drastically decreased.

Ghodsi also says that if there is a rebound in world growth, commodities should do well once again, as should the currencies of commodity-heavy nations. To take advantage of any action here Ghodsi owns the Currency Shares Australian Dollar Trust ETF (NYSE: FXA). Altogether Ghodsi has 10% of his portfolio in currencies, down from 15% six months ago. His currency allotment decreased once the dollar started to gain strength. He uses the foreign currency ETFs as a way to diversify his cash holdings, not for trading.

So how have these currency plays done? The dollar ETF is up 1.6% over the past six months and has risen 13.1% over the past year. The Australian dollar ETF is up 4.7% over six months but is down 21.2% over the past year.

John Osbon, head of Osbon Capital Management, also plays currencies via ETFs, which makes sense since Osbon doesn’t pick individual securities. He says the dollar is the best in a bad lot. Soaring spending and “free” money hurt the greenback, he adds, but the rest of the world is facing similar problems. At least the U.S. has the advantage of having faced such problems early on.

Even so, Osbon only has one currency ETF, the WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB). The fund seeks to earn income reflective of money-market rates in China available to foreign investors and to provide exposure to movements in the Chinese yuan relative to the U.S. dollar. The fund is 11 months old and so far has returned 1.2% in that time. Osbon likes it because he sees it as a play on China’s fiscal strength, profiting by that nation’s trade surpluses and $1 trillion in reserves.

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