The dollar's recent swoon is a textbook example of just how volatile foreign exchange markets can be. But while the new lows for the dollar have brought quick profits to many investors, the "easy money" has already been made, according to Ed Yardeni, president of Yardeni Research.
"Trading in currencies is a dangerous game," he said.
Whether the dollar weakens further or begins to rise depends largely on what the U.S. Federal Reserve does next, Yardeni said, and that is difficult to predict.
Last month, the central bank cut its benchmark interest rate by half a percentage point, to 4.75 percent; the cut was bigger than most on Wall Street had expected.
The Fed also reduced the rate it charged banks for emergency short term loans by half a point.
"There is some expectation that there will be more rate cuts," Yardeni said. "But I think the Fed was aggressive enough in its recent action that it might not have to cut rates again anytime soon."
If the Fed keeps rates as they are, in Yardeni's view, the dollar may stabilize and start trading in a narrow range against major currencies like the euro and the Japanese yen. That could change the fortunes of investors who have been using a spate of new exchange traded funds, or ETFs, to bet that the dollar will keep falling. These ETFs have made it much easier for individuals to buy and sell the pound, the Swiss franc or even the Mexican peso. And some ETFs allow investors to bet that the dollar will rise or fall against a basket of currencies.
Many individual investors have been drawn to these funds. Tim Meyer, the ETF business manager at Rydex Investments, estimated that only about 30 percent of the approximately $1.1 billion that had flowed into the company's eight currency ETFs this year was from institutional investors, like pension plans and hedge funds. He said 50 percent probably had come through financial planners and the other 20 percent from online brokerage accounts.
Although the dollar has fallen against a broad range of currencies this year, Yardeni said the picture might soon become more complex. The dollar might rise against major currencies over the next six months, while falling against others, he said, depending on economic conditions and interest rates in each country.
For example, the yen, which has been floundering for years, has surprised investors by rallying against the dollar recently. But Yardeni said the yen could level off or even reverse course unless the Bank of Japan raised razor-thin interest rates. With fresh signs of deflation in Japan, he said, that may not happen soon.
As for the euro, which traded above $1.40 for the first time this month, Yardeni said he could imagine its going as high as $1.45 but not $1.50. And he predicted that the pound, now trading at more than twice the value of the dollar, could fall to about $1.85 over the next six months.
"We might see a little divergence, where the dollar weakens against the euro and strengthens relative to the pound," Yardeni said. The is because the British economy has a lot of the same risk factors as the U.S. economy, including a shaky mortgage market, he said.
The currencies with the best outlooks were the Australian and Canadian dollars, he said, "because they have what the world wants now, which is raw materials."
The Canadian dollar reached parity with the U.S. dollar last month for the first time in more than 30 years. But Yardeni said he thought the Canadian and Australian dollars might rise an additional 5 percent against the U.S. dollar, the New York Times reports.
The dollar is in the dumps, with the Canadian dollar trading at parity for the first time in more than 30 years and the euro at an all-time high. Is it time to jump on the bandwagon?
Maybe, but you'd better be careful about it.
"The dollar will continue to lose ground," predicts Chuck Butler, currency analyst at Jacksonville'sEverBank. "We're going to have a hard time attracting financing from foreigners if our deposit yields are going down."
Economist Thomas Berner of UBS Wealth Management Research expects the dollar to be weak in the short term but to appreciate over the next year. His view is that Europeans won't be happy with the euro being valued so highly that Americans won't or can't buy European goods.
Nevertheless, Berner thinks foreign economies are stronger than ours and suggests investing in foreign stocks or in U.S. stocks with substantial foreign exposure. He was in Clearwater last week speaking to chamber of commerce members.
The one thing you don't want to do is get caught in a foreign currency trading scam like the one the Commodity Futures Trading Commission accused Pinellas County resident William Folino of running a few years ago.
Through his "Investors Freedom Club," Folino and his associate George Belanger enticed about 150 people into trading Forex (foreign currency futures) with promises of returns as high as 100 percent with little or no risk of loss, the commission said.
While some of the funds were traded, Folino was accused of misappropriating others for his personal expenses. A federal judge ordered him to pay more than $2.3-million in restitution and Belanger to pay $120,000, sptimes.com reports.