Profit from the tumbling dollar
The sorry plight of the greenback is luring investors to pick up US assets on the cheap, but where will it go from here

British investors and homebuyers are rushing to cash in on the plunge in the dollar, which hit a 14-year low of $1.98 against the pound last week and could breach the key $2 mark within days.

The greenback’s decline hit the FTSE 100 index of leading shares because big firms such as Pearson, the publisher, and Carnival, the cruise operator, make most of their sales in America. These will now be worth less when converted into sterling. However, investors have found other ways to profit from the rout.

Spread-betting firms, which let investors gamble on currency movements, said some clients had made hundreds of thousands of pounds since the dollar drubbing started on November 23. Since then, the greenback has shed 3 per cent of its value against sterling and is down 12 per cent over the year.

Simon Denham of Capital Spreads said that in the past two weeks there had been a 50 per cent rise in clients betting on “cable” — the exchange rate between the dollar and the pound — and a 114 per cent jump in people betting on the euro-dollar rate.

He said: “We have a group of four or five investors we call the Cable Group who have made a staggering £150,000 in little over a week by betting the dollar would fall.”

Florida estate agents have also reported a jump in interest from British buyers who think the surge in sterling to its highest level since it was ejected from the European exchange-rate mechanism in 1992 has provided a golden opportunity to snap up a holiday home in the Sunshine State.

A property worth $250,000 would have cost £126,000 on Friday against £145,000 at the start of the year — a saving of £19,000.

Gold is also seeing its biggest inflows of money since the start of the year, according to Barclays Capital, an investment bank. The precious metal is denominated in dollars, so British buyers get more bullion for their pound and have therefore been piling in. Its price in London has gone from a low of $512 earlier this year to $647.

It has not been all good news for British investors. Nearly half of the 100 largest companies in Britain make at least 20 per cent of their sales in the US, and some big UK blue chips, including HSBC, BP and Astra Zeneca, the drugs group, pay dividends in dollars. As a result, investors could find their dividend income is worth about 10 per cent less than last year.

However, some analysts think that now could be one of the best times in decades for British investors to buy into the American market.

Fund managers were already positive about the US on hopes that interest rates had peaked, and the weaker dollar will give American company profits a further boost because it makes exports look better value.

If the pound peaks at about $2, as many analysts expect, British investors could also get a currency boost as the greenback strengthens again.

Ian Kernohan, an economist at Royal London Asset Management, thinks the pound could slip to between $1.85 and $1.90 over the next 12 months. He said: “The fundamentals of the dollar are poor but it needs to fall against the Asian currencies, not sterling.”

Mike Lenhoff of Brewin Dolphin Securities, a stockbroker, agreed that the greenback’s rout was not necessarily negative for world markets. He said: “Dollar weakness should have a net benefit for the US economy. And what’s good for Wall Street is usually good for equity markets worldwide.”

The dollar’s rout has been propelled by interest rates. While the expectation in America is that the next move in rates will be down, rises may still come in Britain. Nationwide said the housing market stayed strong last month, with prices up 1.4 per cent, which will maintain pressure on the Bank of England to raise borrowing costs. This boosted demand for pounds at the expense of dollars.

Then there is America’s huge trade gap between what it imports and exports, which is running at $800 billion (£404 billion) this year.

Julian Jessop at Capital Economics, a consultancy, said: “The deficit leaves the dollar vulnerable to all sorts of scare stories because its value is dependent on the appetite of foreign investors for US assets.”

If the dollar does fall more sharply than analysts expect, it could stoke inflation in the US, and interest rates might have to rise.

Ways to make a quick buck

Is now a good time to buy US property?

Your pound will certainly go further when it is converted into dollars, meaning you can buy a bigger second home. British buyers who have already taken out dollar mortgages will also see their repayments fall in sterling terms, if rates stay the same.

However, there is still widespread uncertainty about where the US housing market is heading. New-build prices are down 10 per cent over the past year and existing homes 3.5 per cent.

But the National Association of Realtors said last week purchases of existing houses rose 0.5 per cent in October, the first increase since February.

The view that the market has bottomed has some powerful backers. Former Federal Reserve chairman Alan Greenspan said last week he detected “early signs of stabilisation”, while the Bill & Melinda Gates Foundation has been buying up stakes in beleaguered housebuilders.

You should still exercise caution because areas popular with British buyers, such as Florida, have suffered the biggest bubbles. Merryn Somerset Webb believes it is still far too risky to buy American property.

Can I buy dollars now?

Yes. Many foreign-exchange brokers offer forward contracts that allow you to lock into a favourable exchange rate now, even if you don’t need the money for many months.

If you know you will need £50,000 worth of dollars in three months’ time, for example, you can agree the exchange rate now. Whatever happens to currencies in the meantime, your exchange rate is fixed.

HIFX requires its clients to pay a 10 per cent deposit. So if you wanted £50,000 worth of dollars in three months’ time, you would pay a £5,000 deposit now and the £45,000 balance in three months.

What about my UK investments?

British companies that do a large portion of their business in America were hit by a wave of selling last week, but analysts are not too worried about the effect on the FTSE 100. Any negative impact should be offset by the boost to the American economy.

Investors could also pick stocks that pay for goods or services in dollars, which will benefit from the greenback’s decline. Morgan Stanley tips BSkyB and Next, the retailer, which buys its products from Asian countries with currencies linked to the dollar.

You could also buy miners such as Xstrata, Vedanta and Antofagasta because metals are priced in dollars, so a weaker greenback reduces their cost, which should boost demand.

What about my US investments?

Now is not the time to sell US funds or shares if you want to bring the money back to Britain because your profits will be worth less when converted into sterling. The return from the S&P500 has been 12 per cent this year, but has dropped 3 per cent when translated back into pounds. If you want to invest in America now because you think the pound will peak at $2, look at funds such as HSBC American Growth and Legg Mason US Equity.

How do I spread bet?

It is not for the faint-hearted because you can lose more than your stake but the rewards can be high. There is no stamp duty and profits are free from capital-gains tax, but you cannot set losses against tax.

On Friday Tradindex was quoting a spread of $1.9799 to $1.9809 for the pound on December 13. You could bet a minimum of £1 for every point, $0.0001, above $1.9809 if you thought the pound would rise. If you were right and the pound hit $2 next week, you would make £191.

Ladbrokes, the betting-shop chain, offers less risky fixed-odds betting on foreign exchange on its website.

How about gold?

When the dollar falls, the price of gold usually rises because it is seen as an alternative store of value. Last week, bullion hit a three-month high of $647..

The easiest way to benefit is to buy Lyxor Gold Bullion Securities, traded on the London Stock Exchange. These are shares that track the gold price. Each share represents a tenth of a troy ounce of gold, so on Friday one share was worth $64

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