The Dollars Doing What?

Well it's all over the press - the plunging dollar has been making news for a while now. But what does it mean for stock futures traders. Well for a start we must remember we can trade US companies' stock futures as readily as UK ones from the same account.

The key thing to remember is with US stocks, one stock futures contract represents 100 shares not 1000 as it does with UK ones. So a 1p movement in Vodafone would be a £10 change in the stock future, but with Microsoft a 10c change is a $10 change in the stock future.

What does the dollar's declines mean? Well, for a start it makes buying US goods cheaper for all Euroland and Sterling-land. So for companies like Intel, for whom a lot of sales are abroad, their earnings should be boosted because their products just became more price competitive.

So witness Intel's price chart. If you bought 10 Intel stock futures contract when the stock was at $16 and sold out when the stock went to $20, you would have a tidy $4,000 profit in the month it took for this to happen.

But wait a minute, what about the currency change while you are dealing in dollars? If you buy a load of dollars now with a view to trading with them for the next two years (of course you don't actually go and buy them, it happens automatically via your trading with your stock futures broker) then you are buying cheap now anyway.

Not for me?

Research over the past 20 years reveals a peculiar aversion among investors to buying into foreign markets.

Everyone says how important diversification can be to the private investor. By investing in a range of uncorrelated stocks, risk can be minimized and even eradicated. So it might be thought that investors would look to diversify in the ultimate of non-correlated stock - those of different countries. Wrong.

One at a time

The idea is to take your inevitable losses one at a time and absorb them into your other, more profitable trades. The equity markets of different countries display an ideal degree of non-correlation.

For example, of the G7 nations, returns on the US index as shown by the S&P500 reveal international stock return correlations for the UK as ranging from 0.35 for Italy to 0.55 for France. This degree of fluctuation suggests that a UK investor would do well to diversify in foreign stock.

Of course, you could go further than US stocks - with one financial instrument, one broker and one currency you could own a diversified portfolio of foreign stocks from Sweden and Japan to Germany and Italy - via Universal Stock Futures (www.liffeinvestor.com on the latest increased list of stocks covered).