Related topics: investments, currencies, dollar, exchange rates, mutual funds
For all those years when the dollar reigned as the unquestioned king of currencies, we Yanks never gave it much thought. A dollar was a dollar, and all other currencies were there merely to befuddle us when we were traveling in foreign lands.
Not anymore. As the greenback swoons, more Americans are trying their hand at the gigantic market for global currencies. With daily volume of $4 trillion, this market is ruled by big financial institutions and venturesome hedge funds. But a raft of new exchange-traded funds and products is giving a lift to the little guy, allowing him to protect his long-term U.S. investments from dollar erosion and to profit from the strengthening currencies of emerging markets.
In short, currencies are emerging as a true asset class for individual investors. They eventually could take a place alongside stocks, bonds and commodities.
More attention to currencies couldn't come at a better time. Ray Dalio, the founder and chief investment officer of Bridgewater Associates, with nearly $90 billion under management, predicts there will be a "seismic shift" among currencies as early as next year, similar to what occurred after the breakup 40 years ago of the Bretton Woods international monetary system. That was when the United States dropped the gold standard, and foreign currencies formerly fixed to the U.S. dollar began to float more freely -- and sharply appreciated against the dollar.
Now, the remaining ties may unravel.
"Linkages are artificially being held together," says Dalio. "The way they are held together is through interventions that are not sustainable. Governments are fighting the laws of economics."
The likely outcome of abandoning the monetary policies that now tie emerging currencies to the U.S. dollar, the world's reserve currency, is a revaluation that puts the currencies of those countries with stronger economic growth and offering higher interest rates -- think China (the yuan) and Brazil (the real) -- in the driver's seat.
Currencies of developed nations -- the U.S. dollar, the European Union's euro and Japan's yen -- will be relegated to back-seat status.
Countries do deals without dollars
A currency's price is always a function of the growth rate of an economy, and that country's ability to pay a real rate of interest.
Dalio isn't the only one predicting big changes. Bill Gross, the founder of Pimco, the world's biggest bond company, with more than a trillion dollars of assets under management, declared currencies the "critical question" for investors in 2011.
"As the dollar weakens, you lose, relative to the rest of the world, if you are in dollar-based securities," says Gross, whose forecast for a weaker dollar is also a forecast that the U.S. economy will not grow as quickly relative to other countries. "It's simply a matter, 20 years down the road, of what the dollar can buy." (For more on Gross' views, see "Bond king Gross dumps Treasurys.")
The buck's global purchasing power already has taken a beating. Thanks to America's loose monetary policy, wide trade deficits and a ballooning fiscal deficit, the dollar has fallen by nearly a third against other world currencies over the past 10 years. It's down 15% since last summer. Ceding its role as a haven in an uncertain world, the dollar has kept falling right through the recent turmoil in the Middle East.
Its importance in world affairs is fast diminishing. In years past, when China would buy soybeans from Brazil, for instance, the transaction was done in dollars. But now, as developing economies mature, the Chinese are starting to pay Brazil in Chinese currency, known as renminbi, of which the main unit is the yuan. Just like children growing up and leaving the brood, these countries don't need the dollar as much anymore. And that's a huge blow to demand for the currency.
