Hedging a Weakening Dollar With Currency ETFs

Roger Nusbaum submits: A reader asked my opinion about the consequence of Iran selling oil in euros.

I have touched on this before, and while there are many angles to this, I have had the same opinion for several years now.

I view the dollar being on a long, slow road to being less important, globally, than it is now or has been in the past. The dollar is the world reserve currency. I think it will soon have to share that designation with another currency or two; the euro and the yuan seem the most logical candidates.

Because every commodity trades in U.S. dollars, there is a certain level of constant demand to transact certain kinds of commerce. Foreign countries need dollars to buy some of the things they consume. If those things become available in other currencies there will be less demand for dollars leaving the dollar weaker.

The consequence would be higher interest rates and generally less demand for U.S. assets. As I mentioned the other day I generally expect lower equity market returns and higher interest rates and this is why.

I do not view this as death blow or a tipping point for Financial Armageddon, but more of a hindrance for accelerating growth.

This is also why I was (and still am) a big fan of the currency ETFs early on. The easy thing, and you can read easy all over the MSM, would be to ignore currency products because they are so 'risky.' Or you can realize that markets and investing do evolve over time, and while currency exposure may not be for everyone, there is no reason not to explore the subject and make an informed decision about whether to own currencies or not.

Comments

[huangjin]

I don't even see a reason for why the dollar should depreciate. They key is how much money the Fed creates. It's very possible the dollar could appreciate, even as foreigners reduce the percentage of their dollar holdings, because the Fed will reduce money supply growth and allow repatriated dollars to make up the difference.

[RogerNusbaum]

the Fed reducing money supply seems like a long shot at this point, no? It has been easy access to money for the consumer that has allowed this expansion to keep going.

Further I would be surprised, as things <em>appear</e... appear to be slowing down some that the Fed would make money more expensive, IMO.

[Internet2k4]

I'd agree the dollar is sinking this year on concerns about economic slowdown and a possible cut in the Fed rate while other central banks are trending up, but would think there is a practical floor. Long term would guess the buck will only decline ver-r-ry slowly, and only if and when the Euro zone develops decent levels of domestic consumption. It's not obvious to me that China or anyplace else in the next 30 years will be able to make the cultural, political and economic transitions to create a consumer alternative to the US - witness even Japan's paralysis right at the point where big changes were needed to create a dynamic economic and political system. Premature moves out of the dollar and failure to underwrite the US consumer would risk killing the goose that is laying the golden eggs for these economies. Talk about global warming: watch the oceans rise from sweat pouring off the foreheads of foreign politicians, business folk and eventually central bankers when the floating Euro pushes $1.40, the A$ or C$ push $0.90, not to mention the obviously manipulated Yen and Yuan rates.

[billp2]

is there a leveraged currency EFT?

[RogerNusbaum]

I don't think so but I believe the DirexionFunds may have leveraged OEFs.