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 With the decline in the dollar's value relative to other currencies, there has been a surge of interest in investing in euros. Now before we lose all credibility in the financial community, we want to make it perfectly clear that we understand that the title should be Investing in Euro.
European Currency - Euro and Euros
A quick visit to the official site of the euro tells us that the official term for the currency in the singular and plural form is euro. That means we can talk about one euro or 100 euro - officially. But even the official euro website understands that some languages - such as English - may use the term euros. So we will take that liberty here. We will stay away from the term Eurodollar, which is not an official term of any kind for the euro, but a reference to dollars held in European banks.
That being said, there are two types of currency used in the European community - the euro and the cent. Just like in America, there are 100 cents (or cent) in a euro. The practical benefit of the euro is that people can travel throughout Europe and use a same standard currency.
One of the misconceptions behind the euro is that it would be standardized against the U.S. dollar in terms of its value. This is not true and this is what makes investing in euros so intriguing.
Euros versus Dollars
The euro is currently trading around $1.46 U.S dollars - this is often referred to as the exchange rate. That means it costs $1.46 to purchase one euro. About a year ago euros were trading at around $1.26. That means the euro is not fixed to the dollar and there is an opportunity to make or lose money from the change in the exchange rate over time.
This is the first reason for we would be interested in investing in euros. If the value of the dollar declines relative to the euro, then the investor can make money from this decline. Let's look at this opportunity a little closer.
Why the Euro Exchange Rate Changes Over Time
If you think about the global economy, then each country competes with each other for the sales of goods and services. But the problem is figuring out the relative value of currencies. Without getting into economic theory, let's take it on faith that $1.46 is the right value for the euro. One of the major factors that affect the value of a currency is the faith in that country's economy. If one country's economy is weakening relative to another, then over time there should be a change in the exchange rate.
Exchange Rate Example
For example, if investors believe that the dollar will weaken against the euro, then that means they think euros will be worth more in the future in terms of dollars. Over the past twelve moths, that is exactly what happened. If you purchased 100 euros last year, it would have cost you $126. If you traded those 100 euros back in for dollars today, you would have gotten $146. So you would have received a gain of $20.00, which is a 15.8% return on the $126 investment.
Interest Rates in Europe
In order to combat inflation here in the United States, the Federal Reserve has been keeping interest rates relatively low. Specifically, they have been low relative to interest rates found in Europe. This brings up the second reason for investing in euros - taking advantage of higher interest rates in Europe relative to the United States.
For example, let's assume that a two year government bond in the U.S. yields around 3.4%, but a two year bond for the U.K. is yielding 4.5%. That is roughly a 1% spread in interest rates. This means that interest rates are generally higher by about 1% in the U.K. versus the U.S. Again, this supports an investing in euros rationale. By taking US Dollars and buying government bonds, in euros, then the investor has a second chance to earn a higher return on their investment.
Investing in Euros Risks
When you invest in a foreign currency, you are placing a bet that the euro will grow in value relative to the dollar. Before you place a bet like that, you need to understand the relationship over the past several years and try to predict what might happen in the future. In this case, the euro has strengthened versus the dollar over the past year. The question is - Can this trend continue, will it turn around and for how long?
To a certain degree, you can compare the relative strengths of the countries by looking at the health of their economies. The United States is running up some pretty big trade deficits and the national debt is growing at an incredible rate.
Now many Americans might believe that we will eventually make good on all that debt, but foreign economies are not quite as confident. When the U.S. is seen as a relatively risky investment, then other countries will want to be compensated for the increased risk, if the world agrees then the euro will continue to increase in value relative to the dollar.
Ways of Investing in Euros
Now what we understand why someone would be interested in investing in euros, it's time to talk about how to invest in this currency. There are several approaches the investor can take:
- Savings Accounts and Certificates of Deposit - Right now the average investor that wants to invest in euros via a bank account or CD really only has one choice - Everbank. This is a financial institution based in St. Louis that makes available FDIC insured CDs in over 25 different currencies, including the euro. The minimum investment is $10,000. Larger banks will accommodate this type of request, but the minimums may be out of reach for the average investor.
- European Mutual Funds or Bond Funds - a second option would be to invest indirectly in euros by investing in government bond funds or mutual funds of European communities that are primarily euro based. All major brokerage houses will carry bond funds that fit this description.
- American Express Travelers Check - these checks do not offer the investor the opportunity to collect interest payments, however, they are a way to invest in euros. You can simply order Travelers Check in euros and hold them in the hope of appreciation in value. Certainly there are easier ways of investing in euros, but this method works too. Take a careful read through any fees to make sure they don't eat into your investment too much.
Trading in Euros
We're going to start off by stating we don't really think trading in euros is the same concept as investing in euros. That being said, some people might consider forex currency trading as another way to invest in the euro.
In fact, we see this kind of trading in foreign currency more as speculation than anything else. If you're interested in this topic, we've got an entire article dedicated to the topic of forex currency trading. There you can learn the ins and outs of this exciting and controversial investment opportunity.
About the Author - Investing in Euros
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