Hedging Against the Declining Dollar

June 14, 2009 by  
Filed under Investing

hegde_dollarLast week I published a tip on how an investor can concurrently hedge against inflation and currency risks.

This week Peter Navarro, one of my favorite economists, published an interesting video that does two things. First, it explains why there is likely to be a general trend of a declining dollar against many other currencies. Second, it describes several diverse strategies for hedging against this anticipated decline.

If you are interested in this topic – and you should be as a long term investor – take a look at the video. (RSS and email readers may have to click through to my site to view it.)

Prof. Navarro makes two points that I find significant. First, hedging against the dollar’s decline by investing in Euros is probably not going to work. The European banks have been following (and may continue to follow) the leads of the Fed and U.S. Treasury, leading to similar devaluations of the Euro. You don’t want to hedge the dollar’s decline by investing in a currency that closely tracks movements in the valuation of the dollar.

Second, the recommendation to invest in the Australian dollar (through an exchange traded fund) was something that I had not previously considered. The chart shown in the video demonstrates a lack of correlation between the U.S. and Australian dollar values. This makes the Australian dollar an ideal hedge bet. You can make this play through the FXA exchange traded fund.

In his newsletter, Prof. Navarro explains why we should not be fooled by short term upswings in the dollar:

And by the way, on this note, the dollar rallied last week precisely because the market is worried about Fed rate hikes. When the Fed hikes interest rates, this attracts relatively more foreign investment and thereby draws the dollar up. Given the massive budget deficits, trade deficits, and increases in the money supply that we are experiencing, however, any such cyclical move up can only be short-lived.

This entire topic is worth considering for the U.S. investor concerned about long term portfolio survival.

Don’t forget to check out this week’s Carnival of Personal Finance.

Enjoy the rest of your weekend.

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2 Responses to “Hedging Against the Declining Dollar”
  1. kitty says:

    I am surprised he didn’t mention US exporters. Many of the US companies, for example, get most of their profits from abroad – not just Europe but all over the world. Not only low dollar makes their products more attractive for other countries, but their profits look great when converted into dollar.

  2. Curt says:

    @Kitty – Sure, a few US companies will benefit from a falling dollar, but more of them will not. 72% of the US economy is consumer driven. The weakening dollar will hurt the service sector of the economy, which will lead to higher taxes on the few companies that are making money – which will reduce their profits even if the are coming from exports.

    As a long term investor, you are better off investing outside the US and out of the dollar. The weakening dollar will also reduce the value of your US stocks.

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