Aaron Katsman 88.
(photo credit: )
Here we go again. After a brief respite, the dollar has again started to drop
against many major currencies in the world, including the shekel. In September
alone, the dollar index fell 5.3 percent and declined 8.4% over the course of
the third quarter – its biggest threemonth drop since the second quarter of
Many reasons abound for the current dollar fall. The most popular
one bandied about in the press is because of the threat of quantitative easing
by the US Federal Reserve. Quantitative easing is a form of monetary policy that
centers on increasing the money supply by creating new reserves that are
typically used to buy government bonds and other assets. It is considered to be
effectively printing money, therefore weakening the value of a country’s
I’m no currency trader, but I would expect this current
weakening to stop sooner rather than later. After all, the major currencies that
are rising against the greenback are nothing to write home about and all have
their own serious fundamental issues to deal with.
Kit Juckes, chief
foreign-exchange strategist at Societe Generale, said in a recent interview:
“The currencies market still seems hell-bent on ignoring the sovereign credit
crisis within the euro zone. It’s overly simple to say the euro is benefiting
solely from expectations that the Fed, the Bank of England and the Bank of Japan
are likely to engage in more quantitative easing while the European Central Bank
is less inclined to do so. The euro isn’t really bullet-proof in the long term.
The currency’s recent strength appears tied to perceptions that the Japanese
look set to join in on quantitative easing.”
So while many analysts
believe the dollar will recover somewhat, local Israeli investors with money
abroad still need to take steps to hedge a potentially falling dollar. For those
actually living off dollar-based investments, it’s vital to take the steps
needed to protect the value of the money.
WHAT SHOULD WE DO? One solution
to protect your money against a further dollar drop is to become a currency
speculator. But this would require a lot of money and having to stay glued to
the markets all day long to catch subtle fluctuations in one currency against
another. In fact, several trillion dollars are traded in this manner every day.
Until now, hedge funds and other large institutions with plenty of money to
spare have almost exclusively monopolized this market.
investors, on the other hand, who neither have the money, the time to trade in
currencies, nor the ability to absorb the potential huge losses (currency
trading is very speculative), there are some other good options available to
diversify away from the dollar: • Global bond mutual fund: This is a managed
portfolio of bonds that are denominated in multiple currencies, such as a basket
of currencies (including the yen, the euro, Swiss franc, etc.). Such portfolios
may have little exposure to the dollar. The advantage of this route is that
there is a paid professional who is an expert in currencies and manages the
portfolio for you. In addition, since it’s a bond portfolio, you also get
monthly interest payments. However, be aware that a fund like this can also lose
money and is not guaranteed.
• Currency shares exchange traded funds
(ETFs): Currency Shares ETFs own a corresponding amount of a given underlying
currency. The investment is basically linked to the value of the currency via
For example, a share in the Currency Shares Euro ETF is the
equivalent of owning €100. This gives investors two ways to make money: firstly,
a monthly dividend is paid; secondly, investors can also profit when a given
currency increases in value against the dollar. When the position is sold, the
appreciated currencies eventually translate into more dollars in your
Keep in mind that with both of these options, if the dollar gets
stronger against the world’s major currencies, you can end up losing money.
While this may seem confusing, one should note that for people in Israel who may
be living off their dollar savings or getting help from their parents back in
the United States, it’s extremely important to protect the value of their
money.[email protected] Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people open
investment accounts in the US.