The euro plunged three cents in no time on Thursday… and another two cents on Friday. That’s a dramatic move for a currency.

What happened?

In short, Europe’s equivalent of our own Fed Chair Ben Bernanke said he wasn’t in a hurry to raise interest rates. That was all it took:

That was it? Why? Here’s all you need to know…

Money flows where it’s treated best.

[ad#Google Adsense]By “treated best,” I mean investors will move their money to where it earns the highest yield. And as I’ll show in a minute, you can profit from this.

From firsthand experience, I know money flows where it’s treated best…

As vice president of a global mutual fund back in 1994, I placed the orders for what to do with our cash overnight. And every night, we invested our excess cash in whichever safe major currency was paying the most interest. (That was back when you could actually earn some real interest!)

Thousands of other financial institutions and big companies around the world do the same thing… Every night, money flows to where it’s treated best.

Last week, speculators were buying the euro in anticipation of a future interest rate hike in Europe. You see, the more Europe raises interest rates, the more the euro will attract big institutions. When speculators didn’t get the news they wanted about interest rates going up, the euro plunged.

Once again, money flows to where it’s treated best. And history shows you can exploit this for profit…

Deutsche Bank did a simple study of this idea – using a simple strategy. Deutsche Bank’s simple system is to buy the three currencies with the highest interest rates and sell the three with the lowest interest rates (out of the 10 most traded currencies)… hold for three months… then rebalance.

The rules are simple… But the total returns are incredible…

Since 1980, this strategy has returned over 9% a year. It’s been a good way to diversify, too… Except for 2008, whenever stocks went down in a year, this strategy went up that year.

Deutsche Bank has an ETF that tracks this strategy. It’s listed in Germany. The symbol on Yahoo is DX2N.DE.

This simple system by itself is pretty good. But if you combine it with the simple currency momentum system I shared with you last week, you get something great…

Combining the two systems still returned 9% a year since 1980. But the combined system only had TWO losing years since 1980… and those losses were both less than 2%.

So we have a few lessons today…

1. Money flows where it’s treated best. Among the major currencies, the one paying the highest interest rate has historically risen, as big investors move money to get higher rates.

2. You can make money by following a simple strategy to capitalize on this. And currency gains are usually uncorrelated to stock market gains. There’s a fund that tracks this simple system: DX2N.DE.

3. By combining this system with the one I shared last week, you have a “holy grail” currency system of historic total returns of 9% a year with only two losing years since 1980.

I’ve now shared two ways to make money in currencies: through momentum strategies (like I showed you last week) and through strategies that exploit the idea that money flows where it’s treated best.

If you’re worried about stocks, bonds, commodities, real estate, whatever… consider diversifying some of your money into a currency strategy like the ones I’ve shared. The Germany-listed funds do it for you…

Good investing,

— Steve Sjuggerud                                                          Source:  Daily Wealth

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