The Problem with US Currency
First, I want everyone to know that I am a true blue-blooded American. I fly the American flag on my door, and have statues of Eagles throughout the living room. As keen as I am on the country, I'm not exactly in love with our currency.
When Currency had value
I remember the good old days when the dollars were based on silver and gold. Gold certificates were first issued in 1882. But, in 1933, the liberal whippersnapper, Franklin Roosevelt, stopped the gold certificates and prohibited private ownership of all gold. (Don't worry, Great Grandpa Planchet buried all of his gold in the yard. It's safe -- if only I can find it). Silver certificates, which were authorized in 1878, were next to go. The US stopped redeeming them for silver dollars in 1968. Today our currency is based on nothing -- it's just pieces of paper.
Currency Forecasts
So,why are other country's pieces of paper better than ours? Recently, the US dollar has not fared well compared to other currencies. The Euro today trades at over $1.30, when it used to trade for $1. If all of your money was in Euro's, you'd be 30% richer. But you didn't. The question is what should you do with them now?
No one knows what currencies will do in the future. Threats to the value of the US dollar include heavy deficit spending by the US government. Whatever happens, it is risky to have all of your assets in one currency class. It is safer, to have it spread out over various currencies. In general, if the Fed raises interest rates, it makes the dollar more attractive to investments. If other countries raise their interest rates, their currencies become more attractive. However, investors already factor future rate increases into the price. The biggest change in a currency price comes when there is a surprise.
Many factors can affect the currency price. Many countries, especially China and Japan own huge amounts of US dollars. They have talked about "diversifying" currency, which would mean selling off the dollars. This could drive down demand for the dollars.
The US crackdown on illegal immigration could lead to inflation in labor costs, which could erode the dollar.
The war in Iraq has led to huge US deficits, which helps drive the dollar down.
If there is a sudden housing decline in the US, it could lead to a drop in interest rates by the fed, which could lead to a declining dollar.
Forex Trading
The most aggressive way to get in the foreign currency market is to join the millions of people who trade about 1.5 trillion dollars per day in foreign currency. The advantage of FOREX trading is that you get huge (generally 100:1) leverage. This means that for $1000, you can control $100,000 worth of foreign currency. When the foreign currency goes up,you get 100 times the profits. (On the down side, if you bet the wrong way, your losses are also amplified by a factor of 100).
Foreign denominated CD's and money markets
CD's and money markets can be denominated in foreign currencies. Everbank.com offers many such interest bearing products. It is possible to earn around 11% on Icelandic Kronas, while Japanese Yen yeild nil.
Foreign Money funds
There are many exchange traded funds (ETF's) that trade like stocks, but are simply holdings in foreign currency. Dividends are paid out of the interest the accounts earn. Some foreign money funds are available in Australian dollars (FXA), British Pounds (FXB), Canadian dollars (FXC), Euros (FXE), Swiss Francs (FXF), Mexican Pesos (FXM), and Swedish Krona (FXS).
Foreign Stock Funds
Instead of investing directly in foreign currency, foreign currency exposure can be acheived by purchasing stock in foreign compainies. LIke US stocks, they can go up or down in value. Some individual stocks can be traded on the US stock exchanges. There are also ETF's which hold groups of stocks in various countires. These include stock funds for Australia (EWA), Canada (EWC), Sweden (EWD), Germany (EWG), Hong Kong (EWH), Japan (EWJ), Belgium (EWK), Switzerland (EWL), Netherlands (EWN), Austria (EWO), Spain (EWP), France (EWQ), United Kingdom (EWK), Mexico (EWW), and Brazil (EWZ)