I would not invest in currency

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A friend of mine decided that he was going to invest in currencies and asked me my opinion. I simply told him that I would not invest in currencies.

I would advise most others not to as well. Consider this one of those things that I would not ask anyone else to do that I am not willing to do myself.

There is a lot of talk about the Chinese Yuan eventually becoming the world’s reserve currency. This line of thinking is natural as the economy of Chinas rises and declines in the US. The logical thought would be that the Dollar will lose value and the Yuan will increase.

However, even I wouldn’t invest in currencies. Even in the Yuan. It is simply too risky.

There are a number of reasons:

1) There are many more factors that determine exchange rates than the economy.

Public Debt
Inflation
Tariffs
Interest rates
Political stability
Economic stability

All of these factors rely on political and central bank decisions, which can change without notice or media publication. Consumer spending habits actually have relatively small effects on exchange rates.

2) Even the experts cannot accurately predict exchange rates consistently

My former economics professor told me that if he could predict exchange rates, he would be a rich man. The essence of a fiat monetary system is highly psychological, and we know how unpredictable it can really be.

There have been multiple models developed, but no model has been able to establish a monopoly in the forecasting process.

If you would like more information on exchange rates and currency investing you can look here and here.

Photo Credit: Rob Wiltshire

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