Using Currencies to Diversify Your Portfolio
by Axel Merk
Axel Merk is the president and chief investment officer of Merk Investments. I spoke with him in recently about investing in currencies.
Charles Rotblut (CR): When someone talks about investing in currencies, what does that actually involve?
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Axel Merk (AM): Obviously, everybody has heard of the U.S. dollar, but other countries and regions have their own currencies—say, the euro or the Swiss franc or the Australian dollar or even the Chinese renminbi [yuan]. And if you want to conduct business in that currency, you have to exchange your money; currencies always trade in pairs, and it’s always one currency versus another one.
There are two main ways that we think about currency investing. One is called directional currency investing, and that would be the U.S. dollar versus a currency, a basket of currencies or a managed basket of currencies—say, the U.S. dollar versus the dollar index, which is a basket of currencies, or versus one of our currency funds, two of which are managed baskets of currencies.
The other way to think about currency investing is in a non-directional sense. Non-directional currency investing might take offsetting positions in currencies outside of the U.S. dollar. As an example, rather than taking a position in the U.S. dollar versus the euro, you might think about the Australian dollar versus the New Zealand dollar. What this entails is taking long or short positions in any one currency.
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