The news comes as no surprise, as the exchange rate had not exceeded the critical area of 1.25 for some time. Are there the conditions for a strengthening of the dollar? Maybe. In any case, here are three different ways for those who want to take the opportunity of a further strengthening of the stars and stripes uniform.
Investing in Dollars
Those who want to invest in dollars to benefit only from the appreciation of the currency can open a currency account at their bank. In this way, you will be able to convert euros into dollars, hold them in your account and benefit from the possible revaluation of the exchange rate.
This operation corresponds to the purchase of foreign currency as it was once done when exchanging banknotes. The advantage lies in the fact that with the currency account, there are lower costs than those applied by the currency exchange, and there are no other risks associated with keeping the currency in a safe place.
The disadvantage lies in the fact that the sums deposited in the current account are not interest-bearing or, if they are, the interest paid is shallow.
Buy Bonds in Dollars
This second option is more profitable than the first but also riskier. By investing in dollar-denominated bonds, the gains obtained will be more significant because the interest accrued on the bonds will be added to the currency’s possible revaluation.
It is possible to buy dollar bonds through two different avenues. Switching from the currency account allows you to buy dollars first and then bonds. The interest paid will be credited to the currency account, and dollars can be converted into euros at any time, at your discretion.
This option allows you to keep separate the crediting of coupons and capital from the exchange rate because the currency conversion can take place at any time, at the investor’s choice.
When you want to convert dollars, you have to quickly and easily transport them to your euro account.The purchase of dollar bonds through the euro account, on the other hand, ensures that the equivalent values are converted into currency (or retransformed into euros) instantly. When the security is repaid or the interest is paid, it is converted into euros and immediately credited to the account.
Invest in Euro account
The use of the euro account makes it easier to manage the investment. Still, it is impossible to postpone the conversion of dollars if, for example, the payment of interest coincides with a phase of the currency’s weakness. If you want to buy bonds in dollars, remember to diversify the issuer risk well and avoid too long maturities. This will limit the risk of default or capital loss if the price falls too much and you are forced to liquidate the stock at the worst moment.
Investing in US stocks
Buying US stocks is the third way to invest in dollars. It is also the most profitable because the capital gain deriving from a possible appreciation of the “underlying” is added to the foreign exchange gain. Investing in shares implies more significant risks that can be mitigated or accelerated by the exchange rate.
If the stock market falls but the dollar appreciates, the decline you will suffer will be limited or nil because the exchange rate and the underlying move in the opposite direction.
If the stock market falls and the dollar devalues, the fall you will suffer will be greater than the fall of the underlying because the currency loss will also add to the equity loss.
If the stock goes up and the dollar appreciates, you will have a double return on your investments.
If the stock market goes up but the dollar devalues, the gain you will get will be less than that reported by the underlying because the loss in the current account will act as a brake on the appreciation of the underlying.
A Confession …
With a view to total transparency, allow me to tell you that I have some positions on dollars. I have several instruments that invest in the stars and stripes uniform, and I included them in the Investment Club portfolios a long time ago.