Foreign Currency Investment - Euro or Dollar?

How to Invest in a Foreign Currency?

During these volatile times on world economies, currencies are experiencing extreme fluctuations relative to one another. That leaves an arbitrage opportunity for those keen and risk-tolerant enough to take advantage of foreign currency investments.

Is The Euro a Good Investment Now?

The Euro (European Union currency), at the time of this writing, is back down to 2006 levels, due to fears of the European debt crisis. It all started when it looked like Greece may not be able to pull out of its nosedive. That had a ripple effect on the European economy as other countries' debt levels are now being called into question.

Previously, the U.S. Dollar had been in trouble, with the Euro rising steadily from par (a 1:1.0 valuation with respect to the Dollar) to 1:1.6. Currently, the Euro is back down to around 1:1.2, with speculation that it may continue to fall to par and lower.

What does all this mean for currency investors? Is the Euro a bargain? Should you buy Euros? Or will it continue to crash, giving further rise to the Dollar? Either way, you need to learn about foreign currency investment, and how to invest in currencies, to be able to partake in the opportunity.

Investing in Foreign Currencies

Certificate of Deposit

One of the most direct ways to invest in a foreign currency such as the Euro is to simply buy cash Euros from a bank. This is easiest, obviously, if you happen to be in a European country. However, because of currency conversion fees and the overhead of handling the cash in person, this may not be your best bet. You can also buy an FDIC-insured foreign currency certificate of deposit.

Forex

However, if you're planning on buying and selling multiple foreign currencies, it might make more sense to join a foreign currency exchange market such as Forex. Forex (FX) lets banks and other institutions easily buy and sell currencies.

Exchange Traded Funds

Short of opening a Forex account, if you're a traditional investor used to buying and investing in stocks or mutual funds, it might make more sense to invest in an ETF (Exchange Traded Fund) that invests in a particular currency directly.

In the case of the Euro, one option is the CurrencyShares Euro Trust (FXE). If you want to invest in the British Pound, you could opt for the CurrencyShares British Pound Sterling Trust (FXB). Both of these are ETF's that attempt to mirror the value of their respective currencies, net of trust expenses. If the Euro and Pound increase in value and the U.S. Dollar reverses its recent trend and begins weakening again in relation to these currencies, your investment will increase in value. If, on the other hand, the U.S. Dollar continues to strengthen against these currencies, your investment will lose value.

If, conversely, you're in the camp that feels the U.S. Dollar will continue to rise versus foreign currencies, and that Europe's debt problems are far from over, you could buy shares in the PowerShares US Dollar Bullish (UUP), which uses futures in a euro-denominated U.S. Dollar index to bet against the value of the Euro. Thus, if the Euro continues to decline, your investment in UUP should increase in value.

Foreign Currency Investments - High Volatility = High Risk

There are many options out there, as you can see, that allow you to invest in, or bet against, a foreign currency. We'd like to remind our readers that while a particular currency may seem like a good deal in relation to another one, we are currently in a very volatile market, which means that a currency investment is more risky than it has been in the past. While, as a result of taking on more risk, you may reap higher rewards, there is always the chance that you'll lose your shirt and then some - so tread carefully.