Red hot global currencies

The Indian rupee and Thai baht aren't often mentioned as attractive currencies. But experts say that's changed amid the dollar's recent decline.

By David Ellis, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- The Thai baht will largely be remembered as the spark for the 1997 Asian currency crisis, when its collapse set off a panic in broader financial markets.

What a difference a decade makes.

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A host of global currencies have strengthened recently, helped by dollar weakness and investor interest in burgeoning regions.
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So far this year, the baht has been one of the stronger performing global currencies. Just this July it climbed to its highest level against the dollar since the crisis erupted.

But the baht is not alone. A number of traditionally risky and oft-overlooked currencies such as the Indian rupee and Brazilian real have become a whole lot more attractive recently, according to experts, helped in large part by the declining greenback.

This year has been particularly troubling for the U.S. dollar. An interest rate cut by the Federal Reserve in September and recent signs of softness in the underlying U.S. economy have only pressured an already weakened dollar.

The U.S. Dollar Index, which compares the dollar to a basket of six other currencies including the euro and Japanese yen, is down about 6.5 percent so far this year.

And with the Fed poised to continue cutting rates, the prevailing belief among currency experts is that more weakness lays ahead for the dollar.

Commodities and the carry trade

When the dollar weakens, the cost of commodities such as gold, oil and wheat, which are priced in dollars, tend to move higher.

That, combined with high benchmark interest rates and economic growth, has provided a recent lift to the Canadian, Australian and New Zealand dollars, which rely heavily on commodity exports.

"[They] have been very attractive from a yield as well as a commodity perspective," said Robert Fullem, vice-president of U.S. corporate currency sales in New York at Bank of Tokyo-Mitsubishi UFJ Ltd. "The fundamentals there are very strong."

Investors' continued reliance on the carry trade, in which they borrow currencies in countries with low interest rates and buy assets in regions with higher rates to boost the return on their investment, has also been a boon to a number of global currencies, including the Brazilian real, Turkish lira as well as the Canadian and Australian dollar.

Even though the practice briefly fell out of favor after a rising yen rattled Wall Street earlier this year, hedge funds and other institutional investors are still borrowing currencies like the Japanese yen, to fund a wide range of investments.

"Investors in huge scale have taken to the yen as a vehicle for cheap financing," said Greg Salvaggio, a senior currency trader at Tempus Consulting in Washington, D.C. "We are really seeing borrowing of the yen at levels I've never seen."

Investor interest in stocks and other assets in rapidly expanding regions of the globe has also propped up currencies such as the Indian rupee, which hit a new nine-and-a-half-year high against the dollar Wednesday.

"That appears to be a function of strong overseas demand for Asian equities," said Naomi Fink, a senior currency strategist at BNP Paribas in New York.

Other currencies, such as the South African rand or Russian rouble, for example, have become attractive simply due to their strong economies, strong money supply growth and trade surplus in some instances.

"With the exception of political risk, their currency (the rouble) is massively undervalued," said Fullem.

Playing the currency game

With futures markets pricing in the possibility that the Federal Reserve will cut interest rates at least one more time before year's end, most currency strategists are betting that dollar weakness is here to stay, at least in the near term.

At the same time, they warn that the attractiveness of some of these other global currencies such as a the baht or Canadian dollar, could be short lived.

A prolonged weakness in the dollar, for example, could hurt companies that export goods to the United States, and pressure the value of their currency.

With a pullback in commodity prices seeming likely as gold and oil continue to hover near record highs, that could bode poorly for both the Canadian, Australian and New Zealand dollars, said Brian Dolan, chief currency strategist for Forex.com.

"We've come up against major technical levels where the market says this is overvalued," said Dolan. "This will start to impact demand."

And even as interest in regions such as India appears robust, if investors bail, that could send the rupee tumbling. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.