A Weak Dollar Makes International Funds Appealing

Along with travelers needing more money to pay for their European holiday, a weak U.S. dollar basically means that the goods the United States exports become a lot more attractive to those importing them. However, buying anything European-made (where the euro is the primary currency) and it's going to cost Americans more.

Because of this, Don Cassidy, senior analyst at Lipper, says that makes it "tough for U.S. consumers, but good for starting to repair the balance of payments. On the flipside, a weak dollar makes exports from the United States easier to pay for on the part of world buyers."

When it comes to fund investing, this can all mean investment opportunities. Those opportunities, however, come with some additional risks not found when investing in funds whose portfolios are made up of only U.S. securities.

The most obvious of those risks is knowing just how long the dollar remain weak. While no one knows for certain, Cassidy said the answer depends upon your point of view. "It depends on your future outlook for the dollar," he says. " If you believe, as I do, that further weakness is in store for the dollar, then international funds are indeed a place to be."

Cassidy prefers international funds to global ones because the former exclude U. S. stocks while global funds permit up to 25 percent of their assets to be invested in U.S. stocks. "Not only international funds but also international small-cap and emerging market funds are attractive," he adds. " The latter two will especially continue benefiting as worldwide economic recovery keeps taking hold, as they improve the most as things get better."

Additionally, he thinks that the dollar will remain weak because the U.S. war policy is unpopular outside of our shores and because of America's huge federal deficits.

Tim Tibbles, portfolio manager of the Forward Hansberger International Fund, (FFINX) agrees. "One of the chief factors pressuring the dollar down has been a widening current account deficit. So, any improvement in this statistic could make the dollar rebound."

Because the weak dollar impacts all foreign currency-denominated holdings in your fund's portfolio, Tibbles says that if all else is constant, "the value of those foreign investments will be worth more when translated into U.S. dollars."

Understanding the currency play is one thing. Deciding which is a better investment---stocks or bonds---is another. And while the dollar's value impacts both stocks as well as bonds, again, it's your point of view that dictates which asset class might serve you the best.

"In my opinion, a falling currency hurts bonds more because foreign investors are discouraged from holding fixed-income instruments that depreciate in their hands," Tibbles says. " Stocks at least have the prospect of adjust their prices and responding to changing circumstances."

Cassidy sees it differently: "I would definitely own some of both! World bond funds will protect capital mildly more if the dollar stays weak, than would domestic bond funds." But, he would tend to limit bond funds to those with short or medium maturities.

"Both equity and bond international funds are a bet on a continuing weak dollar," says Cassidy. "So to some extend they will move up and down in parallel. The equity funds will be more volatile. You need some bond funds not only for current income but also to stabilize your overall wealth. But don't forget the lessons of 2000-2002: All your eggs in one basket makes for a mess when that basket drops."