HOUSTON, Apr 21

In our last article. I gave you a brief overview of  how to think about currencies (remember, the hole in the boat illustration). I also showed you the charts of nine currencies that have all appreciated against the U.S. Dollar over the last two years. My point with that article was to deal with any misconceptions that you may have about holding foreign currencies.

At this point, it is important to distinguish holding currency from trading currency. Holding a currency is what you do everyday when you have a checking or savings account, a brokerage account, or a retirement account. In the end, all of these accounts are held and settled in one currency. But the act of trading currencies is much different. Trading currencies refers to a specific and speculative action in which you bet for, or against, one currency (done in pairs) during a short period of time. This concept is similar to trading stocks, only in this case, the financial instrument being traded is a pair of currencies

In this article series, I am referring to holding currency, not to the short-term trading of them.

Our purpose for holding some of our six-month liquid savings reserve in other stable foreign currencies is not rooted in speculation. Instead, it is motivated by a desire to protect our long-term purchasing power.

Four Examples of Stable Foreign Currencies

The U.S. Dollar has been a losing proposition for some time. Over the last decade, the worlds reserve currency has lost over one-third of its value.

This means that those who have held their liquid savings strictly in U.S. Dollars over the last decade have had to earn a 36+%  return just to break even and protect their principal. Without a doubt, inflation is truly an eroding factor on our money.

But what you dont see in the above chart is that some other currency went up while the U.S. Dollar went down. You see, currencies are a like a see-saw. One currency cannot go down unless another rises .  So, to say that the U.S. Dollar is falling is an incomplete statement. Instead, we should say that the U.S. Dollar is falling in relationship to another currency, or a basket of other currencies.

Several years ago, I wanted to know which currencies would benefit from a falling U.S. Dollar. After some research, I came up with a short list. Below are four examples of foreign currencies that have benefited from the falling U.S. Dollar over the last several years. They are listed in no particular order.

The Australian Dollar

Over the last decade, the Australian Dollar has risen a staggering 102% against the U.S. Dollar.

Pros. Australia is a resource-rich nation and the worlds third largest producer of gold. As commodities rise, Australia will continue to do well. So far, Australia has been successful at navigating its way through the global financial crisis. Unlike the Federal Reserves destructive easy-money policies, the Reserve Bank of Australia (Australias version of the Fed) confronted the economic crisis head on by raising key interest rates back in the Fall of 2009. Additionally, Australias stock market outperforms most others every year.

Cons. While I would not characterize Australias dependence on the commodity markets as a tremendous negative, it is a risk factor. If global demand for commodities slows dramatically, this could hurt the country, which in turn, would negatively affect their currency. In particular, a slowdown in Chinese commodity demand could hurt Australia, as the two countries have grown into powerful trading partners. There are also some carry-trade concerns.

The Swiss Franc

Over the last decade, the Swiss Franc has risen dramatically against the U.S. Dollar. And in the last three years alone, Switzerlands currency has risen over 17%.

Pros. The Swiss have had an amazing ability to stay out of the modern rise of global militarism. Switzerland is known for its highly advanced financial services sector, confidential banking, and relatively low inflation rates. The Swiss Franc is considered by many analysts as the one of the most stable currencies in the world. For this reason, it is often considered a safe haven in times of global upheaval. For example, the Swiss Franc has been a big beneficiary of the recent tensions in the Middle East, as well as Japans quake and nuclear disaster.

Cons. I am not currently bullish on the Swiss Franc (for at least the next 9-12 months), as I feel it is currently overvalued against the U.S. Dollar. It is possible that the U.S. will raise interest rates before the Swiss do, which could send the U.S. Dollar sharply upwards against the Swiss Franc in the near term.

The Canadian Dollar

The Canadian Dollar has risen steadily against the U.S. Dollar for the last decade and is up over 6% during the last three years.

Pros. Like Australia, Canada is a tremendously resource-rich nation. It is a prime beneficiary of rising global energy demand, as it holds the worlds second largest amount of oil reserves and is the worlds largest uranium miner. Their huge amount of natural resources allows them to often operate on a trade surplus.

Cons. Canada is Americas top trading partner with over 80% of its exports coming to the United States. This obvious over-dependence upon continued U.S. consumption poses some risk to Canadas economy.

The New Zealand Dollar

Over the last decade, the New Zealand Dollar has risen over 82% against the U.S. Dollar.

Pros. Also known as the Kiwi Dollar, this currency benefits from New Zealands abundant supply of natural resources. Like Australia, they are increasing exports to China.

Cons. Like other commodity driven economies, New Zealands economy could be hurt by a slowdown in global demand.

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3 Easy Ways to Buy Foreign Currencies

1) Buy and Hold the Physical Currency. Buying physical foreign currency is as simple as picking up the phone and calling your local bank. Almost all larger banks have a foreign exchange department where you can trade in your home currency for another currency. The fees on this vary, so you will have to contact your bank for more details. I have found that this is often the most expensive way to purchase foreign currency.

2) Buy a Foreign Currency CD. A few years ago, an FDIC-insured bank called Everbank began offering their clients access to foreign currencies through the familiarity of Certificates of Deposit. The Foreign Currency CDs are unique, in that your principal is FDIC-insured up to $250,000 against a bank failure. However, your principal is not insured against loss in the foreign exchange markets. Typically, you will need a minimum of $10,000-$25,000 to open one of these accounts. I encourage you to look at Everbanks website. It has some wonderful resources for those who are thinking about diversifying into foreign currencies.  You can learn more about Everbank and their foreign currency CDs here .

3) Buy Currency ETFs. You can gain direct exposure to many foreign currencies today through ETFs (exchange-traded funds.) For example, those who want to buy the Australian Dollar can simply purchase the CurrencyShares Australian Dollar Trust ETF. (Ticker Symbol: FXA.)

Heres a brief list of many that are available:

• FXA CurrencyShares Australian Dollar Trust
• FXB CurrencyShares British Pound Sterling Trust
• FXC CurrencyShares Canadian Dollar Trust
• FXE CurrencyShares Euro Trust
• FXY CurrencyShares Japanese Yen Trust
• FXM CurrencyShares Mexican Peso Trust
• XRU CurrencyShares Russian Ruble Trust
• FXS CurrencyShares Swedish Krona Trust
• FXF CurrencyShares Swiss Franc Trust
• BZF WisdomTree Dreyfus Brazilian Real Fund
• CYB WisdomTree Dreyfus Chinese Yuan Fund
• CEW WisdomTree Dreyfus Emerging Currency Fund – Active
• EU WisdomTree Dreyfus Euro Fund
• ICN WisdomTree Dreyfus Indian Rupee Fund
• JYF WisdomTree Dreyfus Japanese Yen Fund
• BNZ WisdomTree Dreyfus New Zealand Dollar Fund
• SZR WisdomTree Dreyfus South African Rand Fund

Each of these trade daily on the financial markets just like a stock. This means to get started, you simply need to open a brokerage account at an online discount brokerage firm (like Etrade or Scottrade.) Transaction costs will be about $10 to buy and $10 to sell. This is by far the easiest and cheapest way to buy foreign currencies. But without a financial advisor, you are completely on your own. You should always talk with a financial professional before diving headlong into the markets.

Tomorrow: No article in observance of Good Friday.

Dont forget register now for tonights free financial education webinar on FTMDaily.com. Click here to register now!

Here at FTMDaily.com, we are working hard to create solutions for you during these difficult times of economic crisis. We invite your feedback and comments on how we may serve you better. Feel free to contact me directly at [email protected] .

In The News Today

1. MARKET UPDATE. Stocks are caught today between the good news of rising corporate profits and the bad news from a gloomy report from the Philadelphia Fed.

2. BAD ECONOMY. U.S. News and World Report says that these five economies are even worse off than the U.S.

3. McINFLATION. McDonalds is warning that higher costs for beef, bread and other items cut into its quarterly margins and that inflation for the year would be worse than expected.

4. AMERICAN DREAM. More Americans than ever are choosing not to buy a home. even as prices are reaching affordable levels. Is home ownership losing its appeal in the U.S.?

5. MIDEAST UNREST. More rumblings in the country of Syria. A mass protest against the Assad government is being planned for this Friday. Watch oil prices.

CNBC has compiled a list of the five most stressful American jobs You can see the list here .

Why So Serious?

Its time to laugh a little. Heres a sampling from some of the late-night jokers.

The Obama administration plans to give the Libyan rebels $25 million in non-lethal aid. The rebels look forward to starting an offensive with Super Soakers and t-shirt canons. –Conan OBrien

Gary Busey said on the Today Show yesterday that Donald Trump would make a great President. Now Trump just needs endorsements from Randy Quaid and Charlie Sheen. –Conan OBrien

Cartoon of the Day