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How To Bet Against The Buck


Personal Business: SMART MONEY

HOW TO BET AGAINST THE BUCK

As the U.S. dollar continues its record slide against major currencies, foreign exchange plays may seem like an easy way to make money. But they're not. Movements are notoriously hard to predict, and the dollar has already plunged 26% against the Japanese yen and 22% against the German mark since January, 1994. "At these levels, it would be playing with fire to count on continued appreciation of the yen vs. the dollar," says Nicholas Sargen, strategist at J.P. Morgan's Private Banking group. And against the mark, which is stabilizing, "the story is somewhat the same," he adds.

Still, many experts believe the dollar will continue to weaken until the Fed raises interest rates further. If you agree, you may want to try to profit by buying a certificate of deposit denominated in another currency. These are available only at a few U.S. banks, such as Citibank (800 755-5654) in New York and Mark Twain Bank (800 926-4922) in St. Louis. Both offer CDs with three-month to one-year terms in a variety of currencies, as well as an accompanying foreign-denominated money-market account for short-term holdings. Citibank's minimum investment is $25,000. At Mark Twain, it's $20,000.

BIG RISK. The CDs are federally insured, but don't confuse these with ordinary CDs. Your risk comes when you convert back into dollars. "There is significant risk and opportunity," says Citibank's Jeffrey Volk. For example, if the dollar fell 10% against the yen while you held a $20,000 investment in a one-year CD paying 1%, you would net $22,444 (including interest) at maturity--for a 12.2% return. But if the dollar strengthened 10%, only $18,363 would be returned to you--an 8.18% loss. If you put the money in a U.S. CD paying 6%, you would end up with $21,200 risk-free.

You can probably get a higher rate by buying a one-year foreign-government bond, but you could face a high minimum-purchase, and the principal wouldn't be insured by the FDIC. Besides, foreign CDs have other uses: If you plan to make major purchases abroad, you could set the currency aside ahead of time. Or if your foreign bonds mature and you don't want to convert them into dollars, you can hold the cash in a nondollar CD.

Even if you think this is the wrong time to bet against the dollar, asset allocators say foreign currency should play a small role in individual portfolios as a way to diversify risk. Just know that if you jump into this arena you won't always have the easy ride we've had this year. Amey Stone


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