By JLP | May 3, 2011
This past weekend’s WSJ had an article outlining some things investors can do to protect themselves from a falling dollar. Here’s a quick summary of that article:
The classic stock play during periods of dollar weakness is large-cap companies that export heavily: Companies in the S&P 500 index derive nearly half of their revenues from abroad, notes Howard Silverblatt, senior index analyst at Standard & Poor’s.
Such companies benefit from a weaker dollar in two ways. In the shorter term, profits rise as companies convert their foreign sales into dollars. In the longer term, their products become more competitive in overseas markets, boosting revenue as well.
During the 12 months beginning in April 1986, the dollar fell 15%, while yields on the 10-year Treasury rose only from 7.4% to 7.5%. By the end of the year, she notes, yields had spiked to 8.9%, as the dollar plummeted an additional 11%.
Basically, if the dollar’s falling, you don’t want to be in U.S. Treasurys. Instead, look to invest internationally through mutual funds.
Commodities can serve as a hedge against the falling dollar because they are priced in the U.S. currency—so as the dollar weakens the price of the commodity rises. That’s one reason why the S&P GSCI Commodity Index, a basket of energy, metal and agricultural commodities, has gained 19% this year.
The article is quick to point out that commodities have risen significantly over the last 12 months and any sort of reversal in the dollar would spell trouble for commodities. In other words, bubbles can form in commodities too.
Two factors are particularly crucial in foreshadowing whether a currency will appreciate in the long-term: a nation’s interest rates and its current-account balance, or the amount of money owed to it by other nations (or the amount it owes others). When interest rates rise, like in Brazil and Australia, investments denominated in those currencies become more attractive to investors seeking yield.
Personally, I think playing currencies is no different than gambling. I’m sure the FOREX people would disagree.
All of this is fine and good but these moves come with risks and entail a certain amount of market timing. In other words, a person would make these moves IF they thought the dollar was going to continue sliding. A different and better way to handle this would simply be through diversification. Consider using the 7Twelve Portfolio, which invests in 7 different asset classes, using 12 different funds. You can read about the strategy here.