Protecting Against a Dollar Decline

Roger Nusbaum submits: A reader asks: Your opinion? To protect assets against a falling dollar, is it better to own a single foreign currency or an ETF like USDX?

I am not sure what USDX is -- ETF wise. I tried to find it in the U.S. and on the Toronto Stock Exchange, but no luck.

There are several ways to bet on or protect against (depending on your mindset) a decline on the dollar. I do not think in terms of owning one thing that will be my dollar hedge. Further I do not think one thing can be the single best way to hedge a drop in the dollar.

Foreign stocks, foreign bond funds, and various types of currency products all do the job. At certain times each one is likely to be the best way to go.

Assuming for a moment the USDX mentioned above is some sort of play on the Dollar Index (if this one isn't, there are funds from Rydex and Profunds that do go long or short the Dollar Index), the reader wants to know about these funds versus the single currency ETFs.

The thing about the dollar index is that it is 57% euro and 13% yen. I tend to think that other currencies make for a better hedge. The only commodity exposure in the Dollar Index is a 0.91% weight in the loonie. The Dollar Index has no emerging market exposure either.

I have written a couple of times about currency being an asset class, along the lines of stocks and bonds. As I view it in that manner, I would want exposure in several different ways, if available. My thoughts on the best blend may not be ideal for other people; this is subjective.

I am also convinced that the types of products available will evolve to provide access to different parts of the currency market with different products.

The bottom line is that if you are concerned about a re-pricing of the dollar, as I am (not talking about a crash though), any product that hedges away dollar risk/exposure will, at a minimum, capture most of the effect, which is the important thing.

Comments

[Mike in the...:]

US Dollar index perhaps?

2006 Nov 02 06:49 PM

[Roger Nusbaum:]

Yes. The reader, though seemed to think it was an ETF.

2006 Nov 03 10:07 AM

[tudelson:]

try the open end rydex falling dollar fund, the open-end templeton hard dollar currency fund, or the new etf that shorts weak currencies and buys the strongest

2006 Nov 03 11:09 AM