Currency Effects along the Pipeline. According to Royal Gazette last week in an interview with Mr. Phil Barnett, president of the Bermuda Chamber of Commerce, recruitment of guest workers into Bermuda is a becoming problematic due to strong foreign currency valuations. Historically, guest workers sought employment in Bermuda for a number of factors:

1. boost in compensation by being paid in a strong outside their country currency (have we forgotten the Canadian dollar, Euro and sterling languishing against the US dollar),

2. with the exception of US citizens and green card holders - total absence from taxation in their home country where tax rates tend to hover around 45% - 55% assessed on earnings, capital gains and dividends

3. the opportunity to participate in a driving innovative insurance market,

4. close proximity to other trading nations, and

5. an idyllic warm climate and welcoming employment environment.

There have always been currency fluctuations in global markets. See chart. When the US dollar was strong, everyone capitalised on the weak Canadian, Euro and Sterling interchange. As an investment advisor and planner services, it also used to be that we would calculate an expatriate's 'real' compensation by grossing up the wages paid here by the effect of tax and their weak native currency. Often, that meant that the 'real' wages (gross compensation needed in the home country to cover the currency and tax deduction) meant that their home wages often had to have been 100-150% higher - wages they could not begin to command at home. With the change in global market conditions, the currency advantage has eroded, while the perceived tax advantage is gone due to the high cost of living here, the effect of the island inflation tax.

Small business issues.>The weak US dollar against the other star prime movers, Canada, UK, Europe and Australia/New Zealand is not just an issue for human resource managers. Local vendors are feeling the differences as well, although Mr.Barritt further stated that that shifts away from strong currencies to the weaker US dollar would represent opportunities to purchase less expensive goods. This is probably true, to a certain extent.

While the shrewd retailer may have access to hedging against these currency changes, by buying contracts to lock in currency prices for some future date of delivery, it may not be so easy for the smaller establishments to achieve the same parity. The Start up or internally funded smaller businessman/woman who, either does not have the capacity or the buying power to switch valuable wholesale contacts, open a foreign exchange hedging account, or find new shipping methods may be very challenged to maintain normal pricing. It is extraordinarily difficult to figure out a markup / profit margin when your cost has an indefinite swing either way of 25%. Ultimately, these costs in the form of inflation and increased prices have to be passed on to the customer to absorb.

Currency impact on Personal shopping. The average consumer in Bermuda has greater challenges. They do not have the resources for instance, to comparison shop other countries for groceries, move their son or daughter to a less expensive college or university in mid term, or switch airlines tickets on a random basis without penalties and more circuitous travel routes. They just get to pay the price here, if they want it, at whatever the price is. Along with seeing their Bermuda currency buy less against the strong star currencies. We have had another devaluation due to latest increase in the Bermuda government stamp tax. As a soft dollar, the Bermuda dollar is traded .93 of 1.00 US dollar; conversely, when US dollars are placed in a Bermuda dollar account, local financial institutions may also charge a fee to convert back to Bermuda dollar

Currency fluctuations can positively (or negatively) affect investments. Because we have access to more than one country currency here (on a routine basis), currency diversification should always be considered when reviewing one's investments. Ideally, a global portfolio managed by a qualified portfolio manager will contain asset allocations to other currencies. In unhedged portfolios, for instance, money managers undergo foreign currency risk (and reward), holding the portfolio in US dollars, but foreign stocks are denominated in foreign currencies. Managers can also increase foreign currency exposure by underweighting US security positions and overweighting foreign positions.

These positions will appreciate and depreciate depending upon global market forces while the experienced portfolio manager will rebalance the portfolio based upon his/her assessment of the profitability of those positions, both from a capital appreciation and currency effect perspective. This is truly where the professional investment manager earns their management fees, by seeking to benefit from currency market swings and capitalizing on the market effect of currency volatility in all market situations.

The global foreign exchange market is possibly the largest in the world, liquid, always in motion. It will remain so, until and unless, all countries share the same currency. Hardly likely! Even if considered in the realm of possibility, sheer economic strengths and weaknesses among nations would cause an underlying tier of currency valuations that would not be equal.

What can you do on an investment basis to lessen the loss of purchasing power?

Be sure that your portfolio is diversified globally - managed portfolios with EUR, YEN, and US dollars exposure are one option favoured by portfolio managers

Consider holding some money market funds in an opposing currency, say euro or sterling. Remember that you must factor in the cost to purchase and the cost to cash back to our native currency. We often forget that currency spreads (the cost to buy and sell) cut into the real currency valuation "profit." What you can hope to achieve is a little parity between currencies and exposure to other country interest rates. You should always consider the effect of these changes relative to your overall financial profile, though and if you will never have use for Sterling, for instance, because you are almost exclusively focused on the US market, then it may not make sense for you. Consider too, whether you will devote the time needed to monitor currency changes for your advantage.

Some investors actively play the Foreign Exchange markets. Be very careful - this is not for the beginners or those who need a financial comfort zone and peace of mind, or who do not have the time to manage this risk.

Mitigating the effect of personal purchases. We have do not have as much control over some necessities of life, such as electricity, but we can practice restraint. Set actual dollar limits for what you plan to spend each month and do not deviate from it. Go online; there are millions of free cash flow management and budgeting websites that can benefit you. This one is excellent and supported by one of my membership organisations - American Institute of Certified Public Accountants. www.360financialliteracy.com

If your utility bill is out of sight, stop using your dryer and restrict air conditioning. Lower your hot water heating unit temperature. Plan for one-pot-only quick meals. Have a family cook-a-thon; fill the oven at one time with enough meals for the week. If your favorite food has gone up 30-40%, look for a cheaper alternative, or do not buy it. Always ask yourself, "Do I really need this?" Betting against the dollar, nine times out of ten, you know in your heart what the real answer is: No.

Stay tuned to the cost of carry and the foreign exchange market explained.

Martha Harris Myron CPA CFP is a Sr. Wealth at Argus Financial Limited. She specializes in objective investment advisory services and comprehensive financial solutions for private clients planning for retirement and lifestyle transitions. DirectLine: 294 5709 Confidential email can be directed to arthamyron@northrock.bm.

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.