Wednesday, November 10, 2004

How can the average investor hedge against the declining dollar?

Here are some funds which invest in foreign bonds, and which should do well if the dollar crashes:

BEGBX (Euro bonds, currency risk mostly unhedged)
PFUCX (PIMCO fund, completely unhedged)
IHHX (Templeton fund, foreign money funds, unhedged)

There is also, which sells foreign-currency denominated CDs.

I think these are better than international equity funds, since many foreign company shares will fall if their currency appreciates too much against the dollar.

Note that if the Bretton Woods II hypothesis is correct (see previous post), we may soon see the European Central Bank intervene to support the dollar. So, although macro trends point toward a dollar correction, it may not happen for years.


Dwight said...

I would be hesitant to assume that this investments would achieve you objective is to profit from a decline in the dollar for several reasons. If you assume that a dollar crash would a source of economic stress (implicit in comment about international equity funds), that event will raise credit quality issues, widen spreads, and adversely impact these portfolios. If you not unreasonably assume that a dollar crash would be accompanied by any kind of interest movement, the results of that movement will likely offset any increase in value currency movements. Finally, the friction and agency cost associated with publicly distributed bond funds is appalling.

Steve Hsu said...


I guess I wasn't very clear in talking about the hedge. You are right that if an actual crisis occurs any of these portfolios might be adversely affected, although I think that there could easily be a "flight to quality" (quality here being a perceived strong currency like the euro) that would help these funds.

Less drastically, if the dollar just drifts down 10-20% over the next few years (as it has in the last year or two), these funds will all do well, as they have.

Certainly if central bankers want to diversify their reserves away from the dollar they are likely to buy the same bonds that are held in the portfolios I listed. And in any case, the Everbank accounts are a pure currency play.

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