Betting on the Weaker Buck

Courtesy : Laura Mandaro - Market Watch

Foreign stocks, bonds, currencies -- even Coca-Cola -- are plays on weak dollar

Some timely investing strategies attempt to profit from this distaste. Foreign stocks, bonds and currencies, along with commodities, tend to rise when the dollar declines.

An uptick in deal flow probably says more about the credit markets than equities, argues Barrons.com's Bob O'Brien.

Even many true-blue American companies, such as Coca-Cola Co. (KO 52.97, +0.63, +1.20%) , can take advantage of a falling greenback because so much of their sales come from overseas.

All of these assets can get an easy boost from currency translation. When the dollar falls, another currency rises.

Commodities generally gain when the dollar loses because they are priced in dollars. Buyers of these commodities must spend more dollars to own an ounce of gold or a barrel of oil when the greenback is worth less.

And a U.S. company that sells goods in pesos, for example, gets a bonus when it translates those earnings or its share price into dollars.

Dollar daze

These trends have been in place since March. That's when a surge in demand for stocks and currencies in countries seen as coming faster out of recession -- such as Brazil -- triggered a slide in the greenback.

Many analysts say it will be tough for the dollar to rebound much while the Federal Reserve keeps interest rates near zero percent and extends its special cash programs --two conditions that make the dollar attractive as a currency to borrow rather than buy. See related story on dollar carry trade.

DXY 76.81, -0.09, -0.11%

The dollar index (DXY 76.81, -0.09, -0.11%) , which measures the U.S. dollar against a basket of its rivals, has fallen 14% since early March, when it had been trading near three-year highs.

The losses are even steeper against currencies from countries that export a lot of commodities, and which are expected to benefit from a coming wave of infrastructure building.

Since early March, the greenback has lost about 30% against the South African rand, 26% against the Australian dollar and 23% against the Brazilian real.

Meanwhile, emerging markets stocks -- as measured by an exchange-traded fund that tracks the MSCI Emerging Markets index (EEM 38.24, +0.15, +0.39%) -- have surged 81%. Oil futures have doubled from their February lows.

"The market is focused on emerging markets leading the world out of recession now, which is not helping the dollar," said Richard Batty, global investment strategist at Standard Life Investments, which manages about $200 billion in assets.

Here are five ways to take advantage of further drops in the U.S. dollar:

1. Currencies.

Exchange-traded funds from Rydex Investments, WisdomTree Investments, Invesco PowerShares and others provide direct exposure to foreign currencies relative to the U.S. dollar. See related story on currency ETFs.

Interest in currencies has increased over the past year after asset classes that were supposed to perform independently, such as stocks, corporate bonds and real estate, crashed together, said Anthony Welch, a portfolio manager at Sarasota Capital Strategies, a wealth manager in Florida.

With foreign exchange trading, "It's always one currency versus another. There's always something going up," said Welch, who helped start The Currency Fund (FOREX 10.41, 0.00, 0.00%) in May to capitalize on this burgeoning interest.

Other mutual funds focused on currencies include Franklin Templeton Hard Currency Fund (ICPHX 9.63, +0.03, +0.31%) , Merk Hard Currency Fund (MERKX 11.89, 0.00, 0.00%) and Rydex Weakening Dollar 2X Strategy Fund. (RYWDX 20.15, +0.07, +0.35%)

Some timely investing strategies attempt to profit from this distaste. Foreign stocks, bonds and currencies, along with commodities, tend to rise when the dollar declines.

An uptick in deal flow probably says more about the credit markets than equities, argues Barrons.com's Bob O'Brien.

Even many true-blue American companies, such as Coca-Cola Co. (KO 52.97, +0.63, +1.20%) , can take advantage of a falling greenback because so much of their sales come from overseas.

All of these assets can get an easy boost from currency translation. When the dollar falls, another currency rises.

Commodities generally gain when the dollar loses because they are priced in dollars. Buyers of these commodities must spend more dollars to own an ounce of gold or a barrel of oil when the greenback is worth less.

And a U.S. company that sells goods in pesos, for example, gets a bonus when it translates those earnings or its share price into dollars.

2. Global bonds. Corporate and sovereign debt, which retail investors can access through mutual funds, are denominated in currencies that may be rising against the U.S. dollar. Investors have also been benefiting from higher yields on this debt.

For the past five years, global bonds as tracked by the Barclays Capital Global Aggregate bond index returned 6.11% on an annualized basis.

That compares with a 5.03% annualized return for its U.S. counterpart. The S&P 500 (SPX 1,044, -6.40, -0.61%) returned less than 1% per year, annualized, over that time.

Robert Siewert, who oversees some of Philadelphia-based Glenmede Investment and Wealth Management's $17 billion in assets, said he prefers to use mutual funds to spread the risk of a foreign issuer's default and to gain access to local research on the debt. Returns from the three global bond mutual funds Glenmede is using have ranged between 13% to 18% so far this year, Siewert said.

There's wide variety among the strategies fund managers can take in a global bond portfolio: Some focus on government debt; others also buy corporates; some include U.S. debt. This year, emerging market bonds have been a bright spot.

3. Foreign stocks. The weak U.S. dollar has boosted U.S. investors' returns on their overseas investments. It's provided added juice to emerging-markets stocks that are making big gains in their local markets and helped developed markets outside the U.S. outperform the S&P 500. See related story.

The MSCI EAFE index, as of Sept. 24, was up 26% in U.S. dollar terms this year. But in local currencies, the index of developed countries' markets had only risen 18%. The difference came from the fall in the dollar.

4. U.S. multinationals. American companies that generate substantial sales outside of the U.S. are often the choice of stock investors who are leery of overseas investments but want the currency advantage, said Paul Hickey, co-founder of Bespoke Investment Group in Harrison, N.Y.

Earlier this month, his firm looked at the S&P 500 companies that book more than 50% of their revenues outside the U.S. -- a group that tends to do better when the dollar falls.

Among those internationally oriented companies, shares of several had hit new multi-month highs.

These include more obvious international plays, such as General Electric Co. (GE 16.35, -0.02, -0.12%) , 3M Co. (MMM 73.80, -0.30, -0.40%) and Caterpillar, Inc. (CAT 51.13, -0.07, -0.14%) , along with less well-known health and technology providers such as Xilinx Inc. (XLNX 22.65, -0.52, -2.24%) , Waters Corp. (WAT 54.77, -0.32, -0.58%) and Teradyne Inc. (TER 9.15, +0.15, +1.67%) .

APA 91.61, -0.37, -0.40%

Energy firms Halliburton Co. (HAL 26.79, +0.05, +0.19%) and Apache Corp. (APA 91.61, -0.37, -0.40%) have also rallied.

"What you generally get is a lot of technology, industrials and energy companies. What you don't tend to have is consumer discretionary and financials," Hickey said.

But some brand-name U.S. consumer companies, such as H.J. Heinz Co. (HNZ 39.77, +0.05, +0.13%) and Coke, also made Bespoke's list. They both make more than half of their revenues outside the U.S.

5. Commodity-linked stocks and funds. A big part of the recent rally in oil, gold and other commodities is the falling dollar, analysts say.

"The dance between the dollar and commodities is becoming wearisome to watch," wrote Mike O'Rourke, chief markets strategist at New York institutional brokerage BTIG earlier this week.

William Van Keulen, an investment manager at Carnick & Co. in Colorado Springs, Colo., says buying mining stocks such as Southern Peru Copper Corp. (PCU 29.94, -0.27, -0.89%) and commodities is part of a three-pronged strategy designed to benefit from the weaker dollar.

Gold "is a protection against your currency falling," he said.

For all these strategies, it helps to be nimble. The dollar's decline could easily reverse.

A move away from stocks and into some safety assets, such as U.S. Treasurys, actually helped lift the U.S. dollar index for the week. See Currencies.

"The dollar can work under two scenarios: If it's leading the world out of recession or risk aversion remains high," said Standard Life's Batty.

Batty's asset-allocation team looks for the dollar to rebound, in fact, because they expect the U.S. economy, helped by huge monetary and fiscal stimulus, to emerge stronger from recession than Europe and Japan.

"In between," he said, "it's problematic for the dollar -- the market is not sure if the U.S. leading the other developed economies out of recession."