Investing in USD from the Eurozone (Jan 2015)

Question

A local economics professor recommended opening a "checking account" (forex account?) in USD with euros. He estimates a 5 to 10% yearly growth in the EURO value of such an account. For instance, converting 500 euros to USD now and converting back in a year would net you 525-550 euros (excluding forex costs).

The idea seems to be that the USD is expected to continue climbing, especially compared to the EUR which is weak and unlikely to recover because interest rates are kept low.

• Is this solid advice?
• Would it be solid advice depending on the currency conversion costs?
• Does this carry the same risk as normal forex speculation or is it lower risk because it involves (seemingly) stable economies?

Answer 1

Is this solid advice?

No, this is speculation, this is not solid advice. It is only solid advice if part of your income and/or expenses (current or expected) are in USD. Then you might want to hold part of your cash as USD. Otherwise all of your cash should be in your local currency.

Would it be solid advice depending on the currency conversion costs?

Even less. All transactions have a transaction cost. It is not solid advice with zero transaction costs, and it is even less solid advice with positive transaction costs.

Does this carry the same risk as normal forex speculation or is it lower risk because it involves (seemingly) stable economies?

What you consider as "normal forex speculation" is the key here. For me, normal speculation is buying something and selling something else to take advantage of supposedly known exchange rate changes. So, according to me, this is exactly as risky as "normal forex speculation", because the advice is just that -- normal forex speculation.

However, there are people who have highly leveraged forex positions. They take a huge loan in one currency and then sell that currency to buy something else. This advice does not involve leverage. So, it is less risky than a leveraged forex position (which I would never ever do).

Something to think about is the time frame, too. The longer the time frame, the larger the risk. Those who do forex speculation often do short term speculation. This advice, a form of long term speculation, is more risky than short term speculation.

So, to summarize:

• The larger the leverage, the larger the risk (the advice involves no leverage)
• The longer the time frame, the larger the risk (the advice has a long time frame)

Answer 2

No, this is not solid advice. It's a prediction with very little factual basis, since US interest rates are kept just as low and debt levels are just as high as in the Eurozone. The USD may rise or fall against the EUR, stay the same or move back and forth. Nobody can say with any certainty.

However, it is not nearly as risky as "normal forex speculation", since that is usually very short term and highly leveraged. You're unlikely to lose more than 20-30% of your capital by just buying and holding USD. Of course, the potential gains are also limited.