Right now, the lowering strategy is winning, and the lower U.S. dollar interest rate means that investors are likely to park their investments and savings in other currencies that pay higher returns. This reduces demand for dollars and means the dollar may fall even more against other currencies.

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This creates the perfect Multi Currency Sandwich position…an investment strategy that borrows a potentially weak currency at a low interest rate and invests the loan in a potentially strong currency at a higher rate of return.

The troubles of the U.S. dollar are so serious right now that one opportunity–unimaginable in the 1980s and 90s–is to borrow U.S. dollars to invest in Russian rubles!

Russian political stability looks strong with the new president Dmitry Medvedev assuming office. But Russia is facing many economic challenges, especially inflation. One way the Russian central bank will likely solve this is a revaluation of the ruble. This creates the potential for significant gain due to the interest rate differential between the ruble and the dollar…in other words, a “positive carry.”

My banker at Jyske Bank just offered a Bank of Moscow bond issue that matures in 2009. The bond has a coupon of 7.25%, but sells at a slight discount so the yield is 7.35% per annum. Because of falling interest rates in the U.S., Jyske Bank will lend you dollars for 4.5%. This means you make 2.85% positive carry by using Bank of Moscow bonds to borrow dollars.

For example, say that you invest $100,000 in the Bank of Moscow bond mentioned above. You earn $7,350 a year interest. If you use that $100,000 bond as collateral and borrow $200,000, your cost for the loan at 4.5% per annum is $9,000 a year.

You use the borrowed $200,000 to buy Bank of Moscow bonds, increasing your yearly interest income to $14,700, or $5,700 more than the interest cost of your dollar loan.

Now your total return on the $100,000 you originally invested is $13,050. Your Multi Currency sandwich has nearly doubled the return on your investment. Plus, since your Bank of Moscow bond is actually bought with and denominated in rubles, you stand to gain on any appreciation of the Russian currency as well. If the ruble appreciates 10%, your Forex gain would be $30,000…a nice bonus.

Fundamental fiscal conditions in the U.S. suggest that the greenback will remain weak. Economic conditions point toward continued low dollar interest rates. However, there is always a risk of reversal of rising interest rates and a stronger dollar versus the currency you invest in. I suggest using this technique only for mid- to long-range investment timeframes…five or more years. And never leverage more than you can afford to lose.

Gary Scott
For International Living

Editor’s Note: Gary has been dealing with bonds and currencies for almost 40 years. He never worries about the value of the dollar, or the recession as there are always currencies…and companies…that can weather the storm…even prosper…over the long term. To see how you can do this, too, read this special report.

Source: Safe Bonds with 7.35% Yield

This we all know. But what if all goes wrong? What if the people the bank lends to don’t pay them back? What if too many savers want their deposits back? Basically, what if the bank runs out of cash?

Northern Rock posed this question last year. As well as using deposits, the Rock also topped up its lending from the money markets. But then the money markets seized up, and it was game over.

So the question was asked – what should be done now that it’s all gone wrong? It stumped the powers that be. The FSA, the Government, the Bank of England – they all scratched their heads. They scratched and they scratched, for several months, until they’d worn holes in the tops of their heads.

A bank is a private business. A bank that runs out of money, like any business that fails, can expect to go bust.

But, as we all know, that didn’t happen with Northern Rock. Once the head scratching was over, Northern Rock was nationalised. This marked a major deviation from the way private enterprise is supposed to work.

So now, the Treasury is drawing up plans for something called the special resolution regime (SRR). The idea is that in future the SRR would swiftly liquidate a failed bank, strip it of its assets and appoint new executives. Just as would happen with a failed business in any other sector.

But there’s a problem. Who will run the show? The FSA didn’t come out of the Northern Rock crisis very well. But the regulator would no doubt argue that its past performance should not be taken as a reliable indicator of the future.

Bank of England governor Mervyn King has reservations. He suggests there could be reluctance on the part of the FSA to pull the trigger if another bank fails. His reasoning is that this would be an admission of failure on the part of the regulator who allowed said bank to fail in the first place.

But the FSA counters that involving the Bank with a final decision would mean it would also inevitably become involved in monitoring, duplicating the FSA’s role.

Personally, I don’t really care who wins this little turf war. If I had to pick a side I’d go for the Bank. Call me a traditionalist.

A more fundamental question is how on earth have we got into this situation? As noted above, a failing bank should… well, fail. Adam Smith’s Invisible Hand is supposed to allocate the spoils of business to those most deserving. Those who get it wrong get less… if they get it really wrong they get nothing.

But the workings of the market have been gummed up by regulation. That and political fear (runs on banks don’t look good on the telly. Better do something, quick!)

It’s this political fear that creates moral hazard. The banks knew the Government would never risk letting them fail. So they were happy to take big risks.

Now an institution, the SRR, is being created to effectively force punishment upon banks that mess up.

Welcome to the age of the Visible Hand.

Hold your nerve, Merv!

Hurrah! It’s the day before the Bank of England’s Monetary Policy Committee (MPC) meets to decide what to do with interest rates.

Because I’m a sad man, I set up our very own Fleet Street Daily shadow MPC. Better-looking than the official MPC, our committee comprises seven wise men, one wise woman and Glenn, a bloke from Grimsby.

And my, was it close! A five-four split in favour of a quarter-point cut.

Not that this is what we expect the Bank will do. Nor necessarily what it should do.

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“And there’s also talk of US interest rates rising,” adds colleague Frank Hemsley. “That would put sterling in serious trouble! Especially if the Bank of England cuts our rates.”

Indeed. A weak pound would make imports – including food and energy – even more expensive. Meaning more inflation, and pressure to put rates back up if the Bank adopts a US Fed-style aggressive rate cutting policy.

Personally, I’d favour keeping rates on hold. Businesses and consumers are rational. They see the economy is struggling, and they’ve changed their behaviour accordingly. This is why each day we see new ‘bad data’. Cutting the base rate by a quarter-point will do little to change prevailing sentiment.

What it will do, though, is further undermine the Bank’s reputation as an independent inflation fighter. So I’m hoping the Bank stands firm and leaves rates where they are. It won’t be popular, but being popular is not the Bank’s job.