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This is a thought experiment that I came up with. Imagine someone took their money (say, 100 USD) and put it in a market-cap weighted fund of all the world’s currencies. Could such a fund gain in value over the long run, or would it stay the exact same as the growing strength of one currency is subsequently undercut by the weakening of another?

I had two possible answers. My first thought was that you could only make money if the currency you were paid out in was worth more compared to the average of world currencies than when you bought it. For example, if someone invested 100 USD into this fund when the dollar was a stronger-than-average currency but then sold their position (and got paid in USD) once the dollar was a weaker-than-average currency, they would lose money. The opposite would happen if the currency you were paid out in was more valuable than when you put it in. You might be able to protect yourself from inflation with this method but not from your native currency’s fluctuation in value on a global scale.

My second thought was that the fund could make money insofar as capital markets continue to democratize. In the same way that stocks have higher valuations now that millions of common people are able to invest in them (more money chasing the same profits), the average-of-world-currencies may increase in value if suddenly 1 billion Indians get Fidelity accounts and start investing/speculating on currencies.

Thoughts?

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    What does "market cap" for currencies even mean?
    – D Stanley
    Commented Mar 6 at 14:18
  • You would hold a currency in proportion to that currency's total value as compared to other currencies.
    – Enter4343
    Commented Mar 6 at 14:54
  • For example, if someone invested 100 USD into this fund when the dollar was a stronger-than-average currency but then sold their position (and got paid in USD) once the dollar was a weaker-than-average currency, they would lose money. Unless I misread this sentence, the opposite of this is true. If you buy e.g. EUR when USD is strong (compared to EUR), you get "more" EUR for your USD. If you sell a strong EUR when USD is weak, you get "more" USD for that strong EUR, so you end up with more USD than before. If you can buy more things with this is another question (e.g. inflation).
    – Solarflare
    Commented Mar 6 at 15:13

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There is a fundemental flaw in your hypothetical:

What currency do you use to purchase a unit of the fund?

What currency do you receive when you sell it?

You would need to buy it in a particular currency, and expect to receive it in that same currency. Therefore, you are giving up, say, $100 USD, to receive, say, $5 USD, $2 CAD, $2 AUD, 3 GBP... etc etc.

So in a year, when you sell your bundle of 'all currencies', you would receive some total amount of USD. Basically, you would be paying $95 USD to buy a collection of all non-USD currencies, + $5 USD to buy $5 USD. So you would gain or lose based on the relative value of USD to all other weighted currencies. You can't escape the notion of needing a currency to value your bundled package with, and are always left with that particular currency becoming the relative comparator to all other currencies.

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