Your Investments: Two ways to hedge against a falling dollar

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.

By AARON KATSMAN
An accountant calculator taxes 370 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 370
(photo credit: Ivan Alvarado / Reuters)
Here we go again. Thought the dollar had stabilized against the major global currencies? Well guess again. After a strong nine months that saw the greenback run circles against most global currencies (the shekel is an exception), the recent appointment of Janet Yellen as new Federal Reserve head, the dysfunctional US government during the recent shutdown and this past Tuesday’s lousy jobs report, the greenback has started to fall with a renewed vigor. The market is figuring that there will be no “taper” in the foreseeable future and, as such, sees the US continuing to print money and weaken the currency.
This is confirmed by Anthony Mirhaydari, the founder and publisher of The Edge, an investment advisory newsletter. He writes in Marketwatch.com: “And thanks to constant reassurances from Federal Reserve officials, and Tuesday’s weaker-than-expected payroll gains, it doesn’t look like the ongoing $85 billion-a-month quantitative- easing (QE) stimulus is going to be slowed anytime soon. Wall Street increasingly doesn’t expect the much-discussed and much-feared “taper” until sometime in early 2014. And even that depends on Republicans and Democrats coming together by January to forge a long-term budget deal and prevent another shutdown showdown. But the casualty in all this has been the US dollar, which has fallen out of its two-year trading range and now threatens to return to its 2011 lows.”
There have even been calls by the heads of emerging economies to replace the dollar as the world’s reserve currency. Once again China called for a new reserve currency to take the place of the dollar.
While in practice the dollar still remains the world’s looked-to currency, the apprehension of many world leaders and foreign-exchange traders means that investors should look at ways to protect themselves against the potential for further dollar falls.Nothing new
The fall in the US dollar is nothing new. While it has been exacerbated recently due to the government printing money, the dollar has been slowly depreciating since the Korean War in the 1950s. With economic growth now global, and as the world gets wealthier, foreign currencies have become much more stable, and the need to hold dollars as a protection of sorts has become almost irrelevant.How to invest?
Investors need to protect their portfolios against a depreciating currency. The question is how? For individual investors, 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 Australian dollar, the euro, Swiss franc, etc.). Such portfolios may have little exposure to the US 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 investor is basically linked to the value of the currency via the dollar. For example, a share in the currency shares euro ETF is the equivalent of owning 100 euros. 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 account.
Keep in mind that with both of these options, if the US 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.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group Inc. or its affiliates.aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.