COLUMN-Betting against the buck easier said than done

CHICAGO Mon Feb 24, 2014 12:57pm EST

CHICAGO Feb 24 (Reuters) - The U.S. dollar has been taking it on the chin of late. Last week saw the dollar hit a seven-week low against its rival currency, the euro. The greenback also declined against a basket of major currencies, hitting one of the lowest points of the year to date.

The even worse news is that there's not much anyone can do about it right now. Investors whose assets are denominated in the buck can lose value relative to other currencies, and it's difficult to find reliable vehicles to hedge against the decline.

Some $4 trillion is traded in foreign exchange every day, most of it by institutions. It would be nearly impossible for an individual to have the information or trading capability available that large banks and hedge funds employ.

What would you need to know to profit? A panoply of data goes into real-time currency pricing. You'd have to simultaneously monitor news on central bank policies, inflation, gross domestic product, retail sales, manufacturing and housing prices.

Trying to hedge the decline - if it even becomes a longer-term trend - is nettlesome. Exchange-traded funds that allow you to do this are imperfect vehicles that may not reflect day-to-day sentiment. And you are also paying dearly to invest in them, due to high management expenses, so that means making money in them is difficult.

It's also worth warning that currency markets are notoriously volatile from week to week. Traders are engaged in speculation that could sway the currency's values and give false signals.

"A lot of investors can get away with avoiding currency hedging," says Eric Dutram, an ETF strategist with Zacks Research in Chicago. "A lot of developed market currencies are stable long-term. It's hard to see the value in currency ETFs."

If you're concerned about the dollar's decline because most of your assets are denominated in dollars, here are three strategies you can employ to soften the blow - even if some of the options come with drawbacks:

1. Hedge

There are a host of exchange-traded funds that allow you to invest in single currencies or a basket of them. But they are expensive to own and better alternatives should be considered.

If you're bearish on the buck, the most natural play against the dollar would be to short it, that is, bet that it's going to decline. One way to do this is the PowerShares DB US Dollar Index Bearish, which invests in an index of short futures contracts that will replicate the performance of the dollar relative to the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona. In other words, when the dollar loses value against these currencies, this ETF should gain.

To date, though, investing in this targeted strategy hasn't paid off as the PowerShares ETF has lost 0.11 percent year to date through Feb. 21. It's been a weak long-term strategy as well, averaging only 1.7 percent over the past five years through Feb. 21. It charges 0.75 percent annually in fund expenses.

Another currency basket fund, the Merk Hard Currency fund , hasn't done much better, returning 0.6 percent year-to-date through Feb. 21. The fund charges a hefty 1.3 percent in annual expenses. Investing in high-quality debt denominated in non-dollar currencies, the fund also has a position in gold.

2. Go Canadian

What about targeting a single currency as a hedge against the dollar? The Canadian dollar, for example, is backed by a robust economy that wasn't slammed by the 2008 credit meltdown.

But if you chose a fund like the CurrencyShares Canadian Dollar Trust, which tracks the price of that currency, you'd be disappointed as well. The trust is down nearly 5 percent year-to-date through Feb. 21. The managers charge 0.40 percent in annual expenses.

3. Bonds

Even though U.S. interest rates are at practically zero now, if you're concerned about the dollar falling further, one of the better places to be is quite boring - a broad-basket U.S. bond fund.

The iShares Core Total Aggregate U.S. Bond fund, which I hold in my 401(k), owns the lion's share of the American bond market. It's gained 1.5 percent this year through Feb. 21 and charges a measly 0.08 percent in annual expenses. Bond prices gain when interest rates fall.

Yet even bond funds are a flawed hedge to currency declines. They will fall in value when rates climb, although not by much. The iShares fund lost about 2 percent last year. Nevertheless, you'd probably fare much better with a balanced strategy between global stocks and bonds than a targeted approach that wagers on the seesaw battle of individual currencies.