Keep safe from the falling pound
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Associate Editor
David Stevenson Oct 31, 2008
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Stock and property prices are plunging across the globe. As if that wasn't bad enough, if you live in Britain the value of the pound in your pocket is going through the floor as well. So it's little wonder that more and more people are looking towards foreign exchange (FX) markets as a possible way to preserve some of their wealth. Unlike stockmarket investing, FX is a "zero sum game". In other words, when one currency falls, another must rise. It's a bit like a horse race. Individual currencies may represent flawed countries with a list of economic problems, yet however poor the quality of the field, you know there must be a winner – it's just a matter of finding it. With the present Darwinian weeding out of the weak and the sick, the number of realistic homes for your cash is rapidly being whittled down.
High yielders, such as the Australian dollar, which are frequently tied to the fortunes of the commodity markets, are fast falling out of favour and the euro is also in retreat as the market prices in a recession in the eurozone. But most importantly for British citizens, sterling, the natural home for UK residents' cash, is tumbling. In this flight to quality as the carry trade unwinds, investors have been reverting to the US dollar and hard currency favourites, such as the Japanese yen and Swiss franc.
So what are the best ways to move your money into another currency?
Foreign currency bank accounts
One way of hedging the risk of the pound falling further is to open a foreign currency account with a bank operating in Britain. You need to open a sterling current account, which the provider will then convert into an account denominated in your chosen currency, say, US dollars. So if you reckon that the greenback will prove to be the most secure currency option over the next few months, you would deposit, for instance, £10,000 at the present rate of $1.55, giving you $15,500.
If the pound were to drop by 10% against the buck to $1.40, your $15,500 would be worth £11,071, although clearly, the inverse also applies. Citibank UK offers a US dollar current account, which is free to operate, as long as it is kept in credit – an overdraft is available at the bank's discretion. Alternatively, you could open a non-interest bearing deposit account in either Swiss franc or Japanese yen – call Citibank on 0800-008800 for more details.
Currency exchange-traded funds
Private investors can also buy into exchange-traded funds and notes (ETFs and ETNs), which track individual currencies. Db x-trackers offers a US Dollar Money Market ETF (LSE:XUSD), which is like a deposit investing in the federal funds effective rate, currently just below 1%. Selling sterling to park cash in this fund will pay off if the US dollar continues to rise against the pound.
Then there are ETFs that track the performance of the US dollar against the six currencies included in the New York Board of Trade (NYBOT) index weightings (euro 57.6%; Japanese yen 13.6%; sterling 11.9%; Canadian dollar 9.1%; Swedish krona 4.2% and Swiss franc 3.6%). So if you think the dollar looks a good bet across the board – and it does look likely to rise against the euro and sterling at least, near enough 70% of the basket – the Powershares DB Dollar Index Bullish fund (NYSE:UUP) might be a good bet. The fund benefits from an overall rise against this basket and also pays interest based on three-month US Treasury Bills.
Spreadbetting
FX spreadbetting has grown very fast because it's one of the easiest ways to bet on individual currencies – and it's cheap, too. "Many active FX clients have switched to spreadbetting FX as the spreads have come down," says David Jones at CMC Markets. Account providers include CMC Markets and IG Index. You can compare leading spread betting accounts here.
Currencies are traded in pairs, with figures quoted to five places. To bet on the dollar rising or falling against the pound, you would buy or sell USD/GBP (the currency you are betting on appears on the left). So you could buy USD/GBP, having been quoted a spread of 0.6365/0.6368, at a rate of £5 a "pip", or "tick" (representing a 0.0001 movement in the exchange rate). If the dollar gains, you can close your position at a profit of £5 a pip. Of course, if it weakens, you'll have lost money.
Spreadbetting has the benefit of being convenient, but it is most suited to short-term trading. And as ever, the bookie generally wins – most spreadbetters end up losing money. That means it's vital to remember that your potential losses are theoretically limitless – so you must either monitor positions very closely, or better still, set a guaranteed stop-loss to limit your downside in case the market suddenly moves against you.
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