For investors sick of watching world currencies smack the U.S. dollar around in recent months, it has felt cozy to throw cash into an international...
For investors sick of watching world currencies smack the U.S. dollar around in recent months, it has felt cozy to throw cash into an international bond fund and profit from fast-growing economies with relatively high interest rates.
But making money outside the U.S. is not the no-brainer it has been.
In the past year, the bet was simple: The U.S. economy was limping along and the dollar was weakening, so betting against the dollar by choosing foreign bonds in an international bond fund could give investors about a 9 percent return.
Now, however, some analysts think the world might be poised for a change, with the dollar strengthening and Europe, Japan and some other areas positioned for economic problems of their own.
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If those countries cut their interest rates to stimulate economic growth, their bonds will no longer have the allure they have had. And if the U.S. is done with its own interest-rate cuts — as many analysts believe — then the dollar will look sweeter to investors.
So investors could be taken by surprise by the thrashing they will endure if the dollar does indeed strengthen for a while and causes people to lose money on a bet against the currency.
An example is clear in the iShares Euro Government Bond 7-10 fund. With the dollar regaining significant strength during a recent four-week period, an U.S. investor counting on the European bonds would have lost about 5 percent, according to Alex Claringbull, senior fixed income portfolio managers for iShares.
A European investor would have made about 1 percent on the fund during that time, but in dollars, money was lost because the euro weakened against the dollar.
“These are interesting times in the currency markets,” Claringbull said. “They are very volatile.”
There’s nothing wrong with diversified investors holding some international bonds for the long run. But if investors make a one-way bet against the dollar, without being diversified, they could be disappointed.
Analysts such as Stephen Jen of Morgan Stanley believe, “We are at an important inflection point for currency markets — that the dollar may be forming a multiyear bottom against the majors and may also rally against some emerging market currencies.”
The U.S. economy remains troubled, but the rest of the world is in the early stages of weakening — with unwelcome surprises ahead, while the U.S. could be closer to the end of its problems.
“We are somewhat stunned by the inability for investors to comprehend the global nature of the slowdown,” said Citigroup strategist Tobias Levkovich. “The slowdown that may have started in the U.S. appears to have spread viruslike to other parts of the world.”