Offshore Banking Explained

Written by tolumi

Friday, 05 December 2008 11:27

Offshore Banking Explained

But why should these alarming currency discrepancies be happening? Economists have offered many different opinions. Some say that the world investment economy is so widely agreed about the overvaluation of stocks that people are backing the dollar because they feel nowhere else is safe enough in the event of a crisis. Others say that the arrival of the euro has simply not been assimilated by the world’s investment professionals or, to put it differently, they aren’t taking it seriously because they simply aren’t used to trading in it. If this is true, then presumably the resistance will disappear in time and we’ll get back to a proper state of balance.

What we must accept is that one of the oldest rules in the book is in temporary suspense. As far as we can judge at the moment, currencies are not being influenced at all by interest rate changes. The slump in the euro is happening despite regular rises in the European Central Bank’s base rate - whereas in Britain, with a relatively static bank rate, the pound keeps on getting embarrassingly stronger.

Offshore Banking Explained - The Currency Market

So what else might be driving the currency market at the moment? Conventional wisdom says that the trade balance, the volume and character of the bond market and the inflation figures all have the power to move things. But America has higher inflation, a weaker bond market and a much worse trade deficit than Europe - all of which ought to mean a weaker dollar. Once again, we seem to come back to the blunt fact that nothing except fashion can really explain it.

As an investor, what can you do about all this? You can open a foreign-currency bank account (subject to national law in your country of residence) and use it for all your dealings. You can buy stocks in companies that are heavily committed to the countries where you think currency appreciation is on the cards. You can opt for one of the many offshore currency funds which will switch your money speculatively from one market to another, and which generally do quite well out of it. You can tie your investments to the euro by buying EuroTop 100 tracker funds.

Offshore Banking Explained - Fund Managers

Finally, if you’re very well connected (and ideally very wealthy), you can play the experts at their own game by using the futures markets. Fund managers regularly hedge their risks by setting aside small proportions of their total portfolios and putting the cash into futures contracts which will repay them disproportionately well if exchange rates should ever move against them. The idea is that the disproportionately large gains on these small sums of money will roughly balance out the capital losses that they suffer on the remainders of their portfolios when things go wrong. But it’s a tough job, and it needs a sharp, experienced mind. Not for beginners.

And if you don’t feel like going to all this trouble? Well, there are always dollars. The world’s most liquid currency isn’t going to disappear overnight. But that’s where we came in.

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