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Two Ways to Protect Against a Falling Dollar

The US government has been going on a printing spree for years, thus devaluating the dollar. How can one protect one's earnings or savings?
By Aaron Katsman
First Publish: 11/29/2009, 2:29 PM

First in a series of articles on finance.

Here we go again. After a brief, six-month respite, the U.S. dollar has again started to drop against many major currencies in the world, including the shekel. As the Obama administration continues to spend money without restraint, there is a growing fear in currency markets that the dollar will continue to weaken, thus causing those who earn dollars to scramble to make up the lost value. How many of us are familiar with the common example of someone in Israel who earns $3,000 a month from abroad, and after converting to shekels, finds himself with 20% less than he would have had a few years ago. Many potential Olim (new immigrants) have contacted me looking for help in trying to hedge against the falling dollar. After all, earning 20% less than planned or having your investments drop in value by the same amount can make or break your Aliyah plans.

Background
The fall in the U.S. dollar is nothing new. In fact, the dollar has been slowly depreciating since the Korean War in the 1950s. Sure, the dollar has had intermediate periods of strength during this period, but the long-term direction continues to be lower. It is hard to find “The” reason for the dollar’s behavior, but my own personal opinion is that as the rest of the world has become wealthier, money has flowed into the local currencies of the main beneficiaries of global growth. This has made other currencies more stable, decreasing the necessity to hold onto dollars. Israel is the perfect example.

What to Do With a Strong Shekel?
One solution is to become a currency speculator. However, this requires a lot of money and having to stay glued to the markets all day long in order 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.

For individual investors, on the other hand, who have neither 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.

1.  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 U.S. dollar. The advantage of this route is that there is a paid manager who is an expert in currencies who manages the portfolio for you. In addition, since it’s a bond portfolio, you also get monthly interest payments. However, you must be aware that a fund like this can also lose money and is not guaranteed.

2. 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 U.S. 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.  

Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker/dealer, Member FINRA, SIPC, MSRB, NFA, SIFMA. For more information, call (02) 624-0995 or email aaron@lighthousecapital.co.il.

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The aforementioned information should not be construed as investment advice.