Paul Michael Brown wrote:
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A well off investor can buy Euros in units of about $150,000 by
purchasing a Euro futures contract at the Chicago Mercantile Exchange
http://www.cme.com/trading/prd/overview_EC2465.html and periodically
rolling over the contract to avoid taking delivery. I think bid-ask
spreads are small enough that expenses would not be prohibitive. I
acknowledge that most investors do not understand the mechanics of
futures markets.

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I concur with the author's thesis that U.S. investors should have some
exposure to foreign currencies, the performance of which tends to be
negatively correlated with the dollar. (Not sure I'm comfortable with
having nearly half my liquid assets in non-dollar-denominated assets, but
that's a post for another day.) The problem, it seems to me, is how the
average retail investor can best accomplish this. Currently, I'm using
Vanguard's EAFE Index fund, which tends to do well when the euro and the
yen are stronger than the dollar. I also like this fund because it invests
in large cap companies with reasonably transparent balance sheets
headquartered in developed nations that have modern legal systems. If
anybody has any other suggestions for sensible, long term investments that
do well when the dollar falls against other major currencies, I'd love to
see them.

Paul Michael Brown wrote:

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The following paper claims that long-term investors should have
significant positions in foreign currencies to hedge the risk of
changing real interest rates. It can be downloaded from
http://papers.ssrn.com/sol3/papers.c...ract_id=320920 .

Foreign Currency for Long-Term Investors
JOHN Y. CAMPBELL
Harvard University - Department of Economics; National Bureau of
Economic Research (NBER)
LUIS M. VICEIRA
Harvard University - Finance Unit; Centre for Economic Policy Research
(CEPR); National Bureau of Economic Research (NBER)
JOSHUA S. WHITE
Harvard Business School
June 2002
Harvard NOM Working Paper No. 02-25
Abstract:
Conventional wisdom holds that conservative investors should avoid
exposure to foreign currency risk. Even if they hold foreign equities,
they should hedge the currency exposure of these positions and should
hold only domestic Treasury bills. This paper argues that the
conventional wisdom may be wrong for long-term investors. Domestic
bills are risky for long-term investors because real interest rates
vary over time, and bills must be rolled over at uncertain future
interest rates. This risk can be hedged by holding foreign currency if
the domestic currency tends to depreciate when the domestic real
interest rate falls, as implied by the theory of uncovered interest
parity. Empirically, this effect is important and can lead conservative
long-term investors to hold more than half their wealth in foreign
currency.

Keywords: Foreign Exchange Rates, Home Bias, Intertemporal Hedging
Demand, Portfolio Choice, Uncovered Interest Parity
JEL Classifications: G12

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In my view, it is foolish for the average investor to speculate in
currencies. If you want to take advantage of the fall of the dollar
against the Euro (and beware you are coming to the party VERY late) you
can do it more prudently by allocating some of your equity position to
European stocks. Look for a fund that invests in Eurozone names and that
is not hedged against currency risk. My view is that having 20 percent of
your equity money invested in non-U.S. names and exposed to currency risk
is quite enough. Others may disagree.

Someone wrote:
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In general, I do think it is wise to diversify one's assets into
foreign currencies such as the Euro. The developments you cite are
public information, especially among currency traders, and may already
be discounted. Currently, short-term interest rates in the U.S. exceed
those in Europe, 2.5% vs. 2%, and the bond market anticipates further
Fed hikes, at least to 3%. Historically there has been some tendency
for higher-interest-rate currencies to appreciate against the
lower-rate ones. There have been hundreds of academic studies of this
"forward discount anomaly".

I am not predicting the dollar will rise or fall against the Euro, just
pointing out that currency bets are never a "sure thing".

An interesting site on the currency markets is http://www.fxstreet.com/
...

I have a tidy nest egg in mutual funds through Vanguard. With the drop of the dollar, and
recent news about China & Russia moving toward the Euro standard for their currencies, and
the prospect of OPEC switching to Euros, wouldn't it be wise to make the switch myself?