How to Profit From the Dollar's Descent

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How to Profit From the Dollar's Descent

Find shelter in a fund that invests heavily in foreign bonds, such as Loomis Sayles Bond. Steer clear of most other “safe havens.”

Since fears of a global economic meltdown began subsiding last spring, the dollar has been tumbling. The greenback has fallen about 15% against a basket of six major currencies, to its lowest level in 14 months, since the stock market bottomed on March 9. Don’t expect this trend to reverse anytime soon.

Several forces are spearheading the dollar’s descent. The biggest is that investors around the world have regained their appetite for risk. By contrast, they rushed into short-term Treasury bills and longer-term bonds as the financial crisis accelerated after the collapse of Lehman Brothers in September 2008. At one point, investors pushed yields T-bills to below zero. People were actually paying the Treasury to keep their cash.

Since then, investors have funneled that cash into more-aggressive investments. “The idea that the economy is recovering is driving up stocks, commodities and corporate-bond prices,” says Kathleen Gaffney, co-manager of Loomis Sayles Bond (symbol LSBRX).

Hedge funds and investment banks are increasingly engaging in the “carry trade.” They borrow dollars at low U.S. rates and use the proceeds to buy bonds in higher-yielding currencies. So long as rates are higher abroad than in the U.S., investors can earn money employing the carry trade. If the dollar falls, they profit more (money held in yen, euros and other currencies gets translated into more bucks if the dollar falls in value). “Add a little leverage [borrowed money] to the trade, and you’re making money hand over fist,” Gaffney says.


Some fear that the U.S. dollar will go into free fall because the nation’s fiscal and trade deficits are so high. But despite saber rattling from China and other nations, that’s highly unlikely. No currency can replace the dollar as the world’s reserve currency in the near future. And China, through its massive holdings of Treasury securities (totaling nearly $1 trillion), owns far too many dollars to desire a collapse. “I really don’t see a danger of the dollar not being the world’s reserve currency in ten years,” Gaffney says. The dollar’s reserve status places a floor under it -- although no one knows exactly where that floor is.

How to play the falling dollar

How can you protect yourself from a falling dollar -- and profit from it? Start by favoring large companies in your individual stock holdings and in the mutual funds you own. Large companies are far more likely than small ones to generate substantial revenues and profits overseas.

Next, make sure you have enough of your long-term money in foreign stocks and funds, particularly fast-growing emerging markets. “Where is the growth going to be?” Gaffney asks rhetorically. “The world is changing. These countries have a huge competitive advantage because they pay low wages.”

But don’t stop there. Diversify your bond holdings, too. Buy either a foreign bond fund or globally diversified Loomis Sayles Bond. Gaffney and her co-managers, including the redoubtable Dan Fuss, who launched the fund 18 years ago, currently have 28% of their assets invested in bonds denominated in foreign currencies. A big chunk of that is in emerging markets.


Loomis Sayles Bond is a freewheeling fund. It invests in investment-grade corporate bonds, high-yielding “junk” bonds, Treasuries, mortgages and convertible securities, as well as in foreign bonds. Over the past ten years through October 13, the less expensive but older institutional share class returned an annualized 9.1%. The fund, which is a member of the Kiplinger 25, sports a current yield of 6%.

Don’t make Loomis Sayles Bond your only bond fund. It’s too volatile to serve that role. The fund plunged 22% last year, although it rebounded 31% this year through October 9.

A fund that invests more assets overseas would be an even better option to profit from a falling greenback. Among the best funds: Loomis Sayles Global Bond (LSGLX), Pimco Foreign Bond Unhedged D (PFBDX) and, if you use an adviser, Templeton International Bond (TBOAX).

I prefer Loomis Sayles Bond or a foreign bond fund over commodities, which I wrote about last week, gold or Treasury Inflation-Protected Securities (TIPS). Traders with itchy trigger fingers have come to dominate the commodities markets, so much that it’s becoming increasingly difficult for rank-and-file investors to get fair prices. Ditto for gold.


You won’t lose money with TIPS if inflation rises, but a falling dollar is likely to push up bond yields, which will drive down TIPS prices. After all, TIPS are Treasury bonds. I doubt you’ll do much better than break even in TIPS over the next couple of years (see Don't Count on TIPS).

Steven T. Goldberg (bio) is an investment adviser.