Are foreign currencies worth investing in?

Can you (and should you) invest in foreign currencies like the US dollar or the British pound? The answer is a little complicated…

| More on:
row of different foreign currency notes rolled up next to each other US dollar 2021

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When you hear an investor list off different asset classes that one can invest in, sometimes 'foreign currencies' are thrown into the mix, along with your usual suspects like ASX shares, bonds, gold or property.

Most of us only convert our Australian dollars into something else when we need to go on holiday, rather than as an investment activity. But is this an untapped avenue investors should explore?

It's relatively easy to own foreign currency these days, either digitally or physically. You can always go down to your nearest bank branch and change your dollars to euros, pounds or yen. Many ASX banks such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) also allow you to open foreign currency accounts, where you can keep your chosen currencies alongside your normal bank accounts.

There are also foreign currency exchange-traded funds (ETFs) available. The BetaShares US Dollar ETF (ASX: USD) is one such option, but there are more out there, including for other currencies like the euro and the pound sterling.

Are currencies an investment?

Some people do make a living trading currency. Currencies shift in value every day, so there are definite opportunities in these moves to make profits. But currency is, by definition, a store of wealth, rather than a wealth-producing asset. You can turn cash into an investment with a term deposit or other cash instrument. But these days, the potential for this is not what it used to be, even for currencies outside the Aussie dollar, with interest rates at near-zero in the countries that issue the world's major currencies. As such, I don't see any real value in holding foreign currency as a 'buy-and-hold' investment.

But what about currencies as a hedge? It might not feel like it to us, but the Aussie dollar is a volatile currency by global standards. Think about it. Just this year, our dollar has been worth as little as 55 US cents and as much as 74 US cents at various times.

Our dollar tends to fall in times of global uncertainty (like we saw in the share market crash in March), so holding some of your cash in US dollars might be a good way to hedge against a global share market crash.

Holding some US dollars is a good strategy if you regularly invest in US shares, such as Apple Inc (NASDAQ: AAPL). I myself tend to hold a cash position in both US dollars and Aussie dollars, with regular top-ups for the US dollar account when the exchange rate is decent. 

Foolish takeaway

I wouldn't class foreign currencies as assets in their own right, but you can manage your cash positions a little better by utilising other currencies, especially if you regularly invest overseas. As with all investments, make sure you're not paying too much in fees though!

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia has recommended Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Diversification

Five different pggy banks, indicating a diverse share portfolio
⏸️ Diversification

What does 'good diversification' mean in 2021?

What does 'good diversification' mean in 2021? Are shares enough? Or should investors chase bonds, gold, or even bitcoin?

Read more »

A man wearing thick rimmed black glasses and a business shirt with red suspenders sits at his desk sorting through the earnings report of Nickel Mines
Best Shares

How I'd identify the best shares to buy now for the next decade

Here’s how I’d unearth the best shares to buy for the long term during what is an uncertain period for…

Read more »

comparing asx 200 to global indexes represented by woman holding up multiple countries' flags
⏸️ Diversification

Here's how the ASX 200 compares to other global indices

Ever wondered how the ASX 200 compares with other indices around the world, like the S&P 500 or FTSE 100?…

Read more »

Block letters 'ETF' on yellow/orange background with pink piggy bank
⏸️ Diversification

Which ASX ETFs offer the most diversification?

Does the Vanguard Australian Shares Index ETF (ASX: VAS) offer sufficient levels of diversification for an ASX share portfolio?

Read more »

diversification for asx shares represented by golden eggs with different titles such as bonds, stocks, funds et cetera
⏸️ Diversification

Is your ASX share portfolio too diversified?

ASX shares, US shares, gold, bonds... When it comes to diversification, can you have too much of a good thing?…

Read more »

Block letters 'ETF' on yellow/orange background with pink piggy bank
⏸️ Diversification

2 ASX ETFs to buy for instant portfolio diversification

Here's why I think you can add BetaShares Asia Technology Tigers ETF (ASX: ASIA) and 1 other ETF for instant…

Read more »

⏸️ How to Invest

3 steps I'd take when investing in today's volatile stock market to make a million

Focusing your capital on financially-sound businesses and diversifying across multiple sectors could help you to make a million in a…

Read more »

⏸️ Diversification

Here are easy ways to diversify your ASX portfolio

Betashares Nasdaq 100 ETF (ASX:NDQ) and these ASX shares could be a great and easy way to diversify your portfolio...

Read more »