Invest in Foreign Currency?

A personal investor recently asked me if he should invest in foreign currency.  Working at UBS, understanding foreign currency and foreign currency exchanges is critical, since profits generated from around the globe in a multitude of local currencies are ultimately translated into Swiss francs for reporting purposes.

For the individual investor, I would suggest foreign currency investments are to be avoided.  Since in its typical you are simply holding cash in a non-US dollar denomination, the investment is that changes in the exchange rate will make that currency more valuable (ie it becomes stronger with respect to the US dollar).  It could happen, of course, but in my view that is akin to a pure gamble.

An investor looking to hedge US-dollar based holdings would better consider investment in foreign stocks (mutual funds) and bonds rather than pure currency.  These holdings can serve as a hedge within an otherwise US-dollar based portfolio, but also represent a genuine investment with an expected based on paid interest, dividends, and /or capital gains.  Foreign currency investments are way too risky and poorly understood by the vast majority of individual investors, and are best avoided.

–Tim Shields, UBS


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