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Overseas Investments Benefit From Decline In Dollar

- Alan Lavine and Gail Liberman

Think the U.S. dollar is still on the decline? It's already down more than 25 percent in value since 2002.

Many analysts say yes. A trade and government budget deficit should cause it to drop more in relation to other foreign currencies.

One way to benefit is to investing in international stock and bond funds which purchase securities with foreign currency. The value of the investment increases when the currencies strengthen.

Owning international funds also helps you diversify.

One of the easiest ways to benefit from the falling value of the U.S. dollar may be through international bonds.

Nasri Toutongi, manager of the Hartford Total Return Bond Fund, expects overseas bonds to register total returns of at least 12 percent this year.

Historically, changes in foreign currency values have played a larger role than interest rates on the total return of overseas bonds. Nearly half of last year's foreign bond fund total returns were due to the decline in the dollar.

"We expect the dollar to decline by another 10 percent against the euro due to the current (U.S. trade) and budget deficits," Toutongi says. "We see opportunities in foreign government bonds, particularly western European bonds. They offer safety and can benefit from currency appreciation.

"While we expect yields on U.S. bonds to rise due to the strong economy and an increase in the Federal Reserve rate, we expect western European government bonds will decline in yield." He cites U.S. monetary policy coupled with the weak economy as chief reasons.

Toutongi believes that bonds represent a better way to benefit from the decline in the dollar than stocks.

That's because bonds move more directly in line with economic factors, such as interest rates, government deficits, and trade imbalances. Stock prices, on the other hand, can be affected by more factors, such as news about a company or whether the stock is undervalued or overvalued.

If you want to invest in foreign bonds, it's often best to stick with a professionally managed mutual fund. Investors pay a pay a big mark-up when they buy individual foreign government bonds. Bond funds get better prices due to large block purchases. In addition, bond fund managers can hedge against currency losses when the dollar begins to gain strength.

Toutongi favors German, French and Italian government bonds that mature in two years. The bonds yield 2.5 percent. He also likes Australian bonds, which yield more than 5 percent. Although Japanese bonds sport low yields of up to 1 percent, the yen should also strengthen against the dollar.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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