Hedging and the Dollar

Leaving aside those of you who have rushed to gold over the last year or five, are any of our readers hedging against the future value of the US dollar by buying foreign currencies (or something else)?  If so, which ones?  Are any of you betting on the US dollar?  Why or why not?

One of the reasons I am asking is that I hear a lot of libertarians worried about future inflation.  But I want to know their revealed preferences (assuming transaction costs are low enough that it is easy enough to reveal one’s concerns through action).

7 thoughts on “Hedging and the Dollar

  1. If you’re that worried about inflation then you should buy TIPS, or blue chips with good div yields. Unfortunately though, most gold bug/libertarian types will continue to be proved wrong by reality, as they have for the last few decades. This is not an investment strategy you want to put any real money behind, lest you be prepared to lose it.

    The inflation play is a rube’s bet. No offense.

    1. I’m more interested in what others think about inflation and what they are doing based on those thoughts rather than what I should do with my investments. I was not worried during the pre-QE2 days about inflation – in fact, quite the opposite. I’m less comfy now. But I haven’t done anything about it. As for my investments, I have terrible balance in my portfolio. I should spend more time thinking about such things!

  2. The best reason to diversify out of the dollar is simply diversification. The best way to do so, IMO, is with non-US equity indices.

    1. That was the idea 10 or 15 years back, but it seems not to have proven out. Most other countries’ stock values have varied pretty much in step with US ones. It may be that we now have a world economy that rises and falls with occasional outliers that soar (Finland when Nokia was hot) or tumble (Brazil today.)

      I too worry about inflation. It must look appealing to our policy makers because it would reduce the cost of our exports, thus perhaps increasing US firms’ sales abroad, and also would reduce the total amount of government debt and commitments for pensions. My hope is to maintain the value of my family’s savings for our children’s education and retirement, but I don’t know how to achieve this.

      1. You’re right that it’s hard to find assets that don’t covary a lot with the U.S. stock market. This is one explanation for the strength of U.S. Treasuries despite high U.S. debt: it’s the one (imperfect) substitute investors find for hedging equity risk. Still, the U.S. represents less than a quarter of world GDP. As the rest of the world develops and becomes more financially integrated, diversifying out of dollar-denominated assets just seems to make sense. It might be a bit premature now, but in 20 years…

      2. Isn’t the key always to have a balanced portfolio, including non-dollar-denominated assets? And not to pay fund managers for what over the long-haul won’t be higher returns than you’d get from a random selection/index fund of stocks.

      3. So true. If there are smarter investment professionals (and some of the PE people may be smarter), they aren’t interested in recruiting money in the small increments that we could toss into the pot. Index funds are a good way to go, and we should be reconsidering worldwide funds in non-dollar equities.

        Sometimes I muse about buying a (very) few Bitcoin for the heck of it, but I get a lot of grief when I mention this around the house. Still, post-Cyprus and with runaway inflation in Argentina and Venezuela, I wonder whether over some period people will start having doubts about fiat currency.

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