Guest Post: How To Advise Clients Who Are Concerned About Future Of U.S. Dollar

Thursday, June 16, 2011 18:27
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Guest Post: How To Advise Clients Who Are Concerned About Future Of U.S. Dollar

Tags: currency | dollar | emerging markets | inflation | trade

The past two and a half years have been quite a wild ride for the U.S. dollar.  First, the dollar was all the rage during the height of the economic collapse of 2008, as institutional investors made a mad flight-to-safety.  With the exception of the Japanese yen, the U.S. dollar was the strongest currency in the world from September 2008 through March 2009. 

 

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Editor's Note: This guest post is from a vendor in the forex trading business, but it has educational value. Forex is traditionally not covered very closely by the advisor press. Let us know if you'd like more stories about forex.  

 

In 2009, however, global equity markets bottomed out, and suddenly a little risk appetite snuck back into the market.  This led to a strong dollar sell-off that continued until November 2009.  In November, it became clear that Greece was in major trouble and facing the very real possibility of sovereign default.  That led to another round of flight-to-safety asset shifting, as capital once again flew into the U.S. dollar, and out of the euro, pound, and other risk currencies.

 

That round of dollar strength lasted from November 2009 to June 2010.  Finally, in June 2010, the International Monetary Fund stepped in and provided emergency funding for Greece.  This led to another rally in risk appetite, and the U.S. dollar took another hit.  In late July 2010, the Federal Reserve confirmed market expectations that it would begin another round of quantitative easing, in hopes of stimulating a very anemic U.S. economic recovery, and this announcement solidified the market’s bearish U.S. dollar view. 

 

From June 2010 until now, the U.S. dollar has depreciated significantly versus risk currencies such as the euro, pound, Aussie, New Zealand kiwi, etc.  Continued problems in the EuroZone and generally concerns about the global recovery have led to another dollar rally in recent weeks.  Suffice to say, the last three years have been extremely volatile in the foreign exchange market.

 

The Future

Casual investor interest in the forex market has increased substantially in the last few years.  Today, many clients are asking their advisors how they can protect themselves against a potentially weak dollar in the future.  Many notable hedge fund managers, analysts, and market experts have purported that the U.S. dollar will surely suffer in the near future due, in large part, to the fact that the Federal Reserve has printed over $2 trillion since the economic collapse of 2008.

 

Notable Dollar Bears

In recent months, two of the best-known investors in American have communicated a rather bearish long-term outlook on the U.S. dollar.  Both Warren Buffet and Bill Gross have consistently stated that the U.S. dollar will depreciate over the medium and long-term due to the unprecedented $2 trillion of Fed stimulus.  Now, of course, this may or may not happen, but the fact is that these types of comments by such high-level investors have caused great interest in currency protection among casual investors.

 

What To Do

This is not investing advice.  However, as a private wealth advisor, there are several options available to help your clients hedge against a depreciating U.S. dollar.  Telling a casual investor to open a forex account is not a good idea.  The classic option is to expose a percent of your client’s investment portfolio to gold.  This has obviously worked extremely well in the last two years, as gold has climbed to all-time Hi’s.

 

A second option, however, is to exposed a certain percent of your client’s portfolio to a currency ETF.  Here are the two most popular currency etf’s that will profit from a falling U.S. Dollar:

  • PowerShares U.S. Dollar Bearish (UDN)     
  • U.S. Dollar Down (UDN)

AnoThe other option, of course, is to buy currencies that will most likely appreciate in the case of a falling U.S. dollar.  Now, this gets a bit more complex, but one aggressive bet would be to buy emerging market currencies.  A strong case can be built for the continued growth of emerging markets over the medium and long-term, and as those emerging markets grow, their currencies will likewise appreciate.  Here are three etf’s that profit from a rise of emerging market currencies:

 

  • Wisdom Tree Dreyfus Emerging Market (CEW)·      
  • Barclays GEMS Index ETN (JEM)·          
  • Barclays GEMS Asia-8 ETN (AYT)

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These emerging market etf’s spread risk out over several countries, but the investor would be heavily exposed to regional risk.

 

These are just a few examples of how you can help interested clients hedge against the very real possibility of weak future U.S. dollar.

 

 

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