Playing the pound is hardly a holiday

Don't hold back from buying your foreign currency now if you are going on holiday soon, but equally don't get carried away with ideas about currency investment, City experts are warning.

With the pound, according to one analyst, "excessively high" even after stumbling last week, the safe bet for people going away in the coming months would be to buy currency now.

There is no great hurry, however. Even if sterling did fall from its present highs (10 francs and 3 marks to the pound, for example), holidaymakers looking to change a few hundred pounds might only miss out on pounds 10-pounds 20 of currency. "It may simply not be worth the trouble," says Graham Swift, an investment analyst at NatWest Stockbrokers.

Indeed, where you choose to buy your currency could make as much difference to the end amount as when you buy it. (Marks & Spencer came top in our survey earlier in the summer - offering 3 per cent more currency than the worst of the banks and travel agents - with Royal Bank of Scotland also a reasonable choice). And if you are planning to buy your currency now, bear in mind the interest you'll forgo and whether you're happy having the money sitting at home until you actually go.

Sterling's strength and, importantly, the prediction that it will weaken again, are also driving suggestions that it may be worth investing in foreign currency. The idea is that you buy, say, francs now at 10 to the pound and swap them back into sterling when the exchange rate comes down again. The same francs would then give more sterling.

But there are a number of serious problems with speculating on currencies, which prompts some City experts variously to describe it as "a mug's game" and "extremely high-risk". Firstly, don't think about walking into a bureau de change, buying your currency, and then selling it back next year at a profit. Even at the keen exchange rates offered by somewhere like M&S (which also has no commission charge) the difference between the buying and selling prices on currencies at any one time is such that the exchange rate will have to improve 5 per cent or more before you even stand to get your original money back. With many bureaux de change, the "spread", including charges, could work out at closer to 10 per cent.

Meanwhile, if you do not have a foreign-currency bank account to hold this currency, (which most people don't - and shouldn't: they cost) you are going to miss out earning interest on this money. The interest you might otherwise earn on your pounds could amount to another 4 per cent after tax.

Admittedly, there are ways of reducing these costs - although they are not well known. Rothschild Asset Management, for example, runs a range of funds similar to deposit accounts that allow investors to choose a currency, earn reasonable interest related to local rates, and switch between currencies for a charge of around 1 per cent. Called the Rothschild Money Funds (tel: 01481 719700), it has no minimum investment.

But even with better deals such as these, analysts still warn against the potential of currency investment. "We try to kill the idea that there's any real money to be made [from investing in currencies]," says Mr Swift. "Currencies don't move as fast as other investments." For example, major European currencies could rise 10 to 15 per cent against sterling over the next year, say analysts. But in the context of sterling's claimed overvaluation, this would hardly be a massive return for UK investors buying, say, francs.

Shares tend to produce higher returns, especially over the longer term. Even taking a currency with a long-established reputation for strength, the returns will often compare poorly with what else you could have done with the money. Say you'd bought deutschemarks nearly 20 years ago, when there were five to the pound. Sterling's recent strength is a blip on a chart of the strengthening mark. But even if you'd sold out when the pound had fallen to a low of 2.2 marks - and including the interest you might have earned on the money - you might have tripled your

money over this period. Even a UK building society would probably have beaten that, while over the same period German shares rose 800 per cent in mark terms alone.

Hence Mr Swift recommends that, rather than taking advantage of sterling's strength to buy currency, investors should use the opportunity to buy overseas stock-market investments that could also offer the potential for currency gains. He suggests looking at European unit or investment trusts, which can be held in tax-free PEPS, although other advisers point to Japan, where the stock market has long been in the doldrums and where the yen has also weakened.

Some advisers believe currency investment should not be written off entirely, however. Investors should be wary of telephone-based schemes offering currency dealing "on margin" - in effect borrowing to invest in the hope of enhancing gains. These tend to be high-risk and are not suitable for most people. But some argue that there is a case for what are called managed currency funds, which give the responsibility for picking a portfolio of currencies to a professional manager; Guinness Flight Hambro is one of the best known in this market. Such funds offset the risk of an individual putting everything into the wrong currency, although it also means you will never catch even the best- available returns from currencies. And managed currency funds cannot be put in PEPS either.