The dollar buy sell has been falling ever since concerns about a worldwide economic collapse started to fade last spring. Since the stock market bottomed on March 9, the dollar has dropped around 15% versus a basket of six major currencies, to its lowest level in 14 months. This trend is likely to endure for a while. The decline of the dollar is being driven by numerous factors. The biggest is that investors all over the world are once again willing to take risks. In contrast, they jumped into longer-term bonds and short-term Treasury bills when the financial crisis intensified following the fall of Lehman Brothers in September 2008. T-bill yields were once pushed below zero by investors. In reality, people were paying the Treasury to hold onto their money.
Carry trade activity by investment banks and hedge funds is on the rise. They take out low-interest dollar loans and invest the money in bonds with higher yields. Investors can profit from the carry trade as long as rates abroad are higher than those in the US. They make more money if the dollar declines. Some worry that the U.S. dollar may plunge because of the enormous trade and fiscal imbalances in the country. However, that’s quite unlikely despite China and other countries’ saber-rattling. In the foreseeable future, no other currency can take the position of the dollar as the global reserve currency. And China possesses far too much money thanks to its enormous holdings of Treasury securities, which come to roughly $1 trillion, to wish for a collapse. In ten years, Gaffney asserts, “I genuinely don’t see a danger of the dollar ceasing to be the world’s reserve currency.” The dollar has a floor since it is a reserve currency, but no one is certain of the exact location of that floor.
What to do about the declining dollar
How can you benefit from and protect yourself from a declining dollar? Start by favoring big businesses in both your own stock holdings and your mutual fund portfolio. Large businesses are much more likely than small ones to make substantial earnings and sales abroad. Don’t stop there, though. Likewise, diversify your bond holdings. Purchase a global diversified Loomis Sayles bond or a foreign bond fund. Currently, Gaffney and her co-managers, who started the fund 18 years ago with the legendary Dan Fuss, have 28 percent of their assets invested in bonds with foreign currency denominations. The majority of that is in developing markets.
Since fears of a global economic collapse began to subside last spring, the dollar has been declining. The dollar has fallen by over 15% against a basket of six major currencies since the stock market bottomed on March 9, reaching its lowest point in 14 months. This trend is likely to endure for a while.
Investment banks and hedge firms are engaging in more carry trades. They borrow money at low rates of interest and put it toward higher-yielding bonds. How can you take advantage of and guard against a weakening dollar? Start by favoring large corporations in your portfolio of mutual funds and your individual stock holdings.