Gold Core

Currency investing

Published by Marc Westlake under Economics |

With the recent declines in the Euro many commentators are suggesting investing in alternative currencies as a way of protecting investor's wealth.

We tested this recommendation and conclude that investing in  foreign currencies does not present a viable alternative for investors seeking to protect themselves from declines in the Euro.

The following graph illustrates this point by comparing a random selection of currencies from a Euro investor's perspective compared to simply holding One Month bank deposits in Euro and the Citigroup World Government Bond Index for terms 1 to 5 year duration.

The following chart illustrates the relative risk and return trade off for these currencies since Jan 2000 compared to cash and Euro bonds

The same returns are illustrated in the table below:

The evidence suggests that although investing in currencies carries risk (and more risk than investing in bonds over this period) there is no suggestion that on average, investors should expect a higher return than cash deposits.

For a more detailed study see here