What’s Next for the Euro?

08/31/2011 1:30 pm EST


Axel Merk

President and Chief Investment Officer, Merk Investments, LLC

The Federal Reserve’s low rate policy will make the Euro attractive, as long as the rates can remain lower, says Axel Merk of Merk Investments in this exclusive interview with MoneyShow.com.

Axel, we certainly have seen some volatility in the past year. What are your thoughts on that and how can we survive it?

Well, what we have seen is that policymakers are ever more engaged in the markets. We are spending and printing trillions. Of course, when you’re spending and printing trillions, the markets are moving.

The problem is, where do you hide when the tide is turning? As a result, investors should really look at their portfolios [to make sure] the sort of diversification they have on paper they really have.

One of the reasons we focus on currencies is because it’s the one area where you can still design a portfolio to have a low correlation to other investments you may be holding, because it’s ever more difficult.

Investors are chasing the policymakers rather than the fundamentals, and as a result we have that extreme volatility, because policymakers are knee-jerk as the reactions are in the market.

So what do you look for when you’re looking at currencies, when the market is volatile?

Well, what we see is that, in the currency market, you can take a direct position on the mania of the policy makers. If you think that in the US, we’re better at spending and printing money than other countries, you can, as a result, sell the dollar and buy another currency.

Say, for example, the Euro—very controversial, but we like it mostly because everybody else hates it, and also because in the Eurozone you have very serious problems.

What we believe is they should be expressed in the bond market, that the weaker countries in Europe should be paying a lot more for their debt. But because they’re spending and printing less money, on the one hand they have all this pain, but you can have a stronger currency on the backdrop of that.

Where do you see the Euro going?

Well, we believe it will continue to climb that wall of worries, and we put it into the context of what’s happening in the US.

In the US, we have a Federal Reserve chairman who has said that going off the gold standard during the Great Depression helped the US recover from the Great Depression faster than other countries. Well, in the Eurozone you don’t try to debase the currency, so you have all these problems, but you have a stronger currency.

That will continue for a long time, because in the US we need to have that weak dollar in order to spur economic growth. Bernanke, the Fed chairman, doesn’t think it’s inflationary. We disagree, but that is the policy being pursued right now.

We don’t say that the Euro is a safe place—there is no safe place at all these days. You have to take a managed approach to it, a diversified approach to anything, including cash, and as such the Euro may play a role in a portfolio.

How do you recommend buying into it?

Well, there are various ways. Somebody who thinks that they know what’s going to happen in the currency market tomorrow, for them a leveraged product might be something they want to look at.

However, most investors are not very good at market timing, so there are single-currency ETFs or there are mutual funds where you can get managed baskets of currencies, and that is a way to get long-term diversification beyond the US dollar by actively managing your currency exposure.

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