How to hedge falling US dollar currency

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hedge falling US dollar currency
hedge falling US dollar currency

With US dollar fluctuating wildly over the last few years, it would be a good idea to hedge your cash holding. Often I come across the argument that falling dollar only matters if you are transferring money outside of USA and/or traveling abroad. While there is some truth to this assumption, this is largely inaccurate in this global economy. Plus you can play the currency trend to your advantage. Following are some easy ways to counter falling dollar and perhaps make some money while at it.

If you want to play other currencies directly, a simple option would be to trade their tracking ETF, Exchange Traded Fund, such as FXE (for Euro), FXC (Canadian$). You can buy and sell them just like you would any other stock without special transaction fees. They pay interest just like your savings account. The other option would be to open FOREX trading account or buy currency funds such as UDN or physically convert the currency.

Be smart about your portfolio picks. There is nothing wrong with sticking with the US companies that you know and trust but keep in mind that companies that have significant business abroad would benefit from weak dollar and hence offer excellent hedging. Think of Coke, Pepsi, Procter & Gamble, Phillip Morris etc.

Buy foreign stock market ETFs and mutual funds. Emerging markets are on a tear in the recent past, especially the BRIC countries (Brazil, Russia, Indian and China). While they have taken a beating along with the US down turn market in the recent past, emerging market's fundamentals remain strong and hence they would continue to return better into the foreseeable future. Just search "emerging market" or your favorite country's name (such as "India") in your online broker's account. PowerShares and iPath offers excellent ETFs.

Buy foreign stocks. If you are able to research companies listed in other markets, you have couple of ways to buy their stocks. You can either open trading accounts in the market of your choice (most brokers would support this. Tip: pay attention to transaction fees) or you can look for ADRs of foreign companies which are listed in NYSE (such as INFY).

Buy Gold and other precious metals. Gold is the universal currency that you should consider having in your portfolio as a means of diversification as well as guarding against inflation. ETF such as GLD is an easy way to play gold. Tip: unless you have time to research, it is better to stay away from buying individual miners and avoid inheriting their operating risks.

Buy commodities. Oil, Wheat, Corn, Soy and pretty much all staple commodities have been on the tear due to falling dollar and inflation. There are plenty of ways you can play, right from buying commodity ETFs to trading in Chicago Mercantile Exchange.

Act now and then relax, knowing that your investment strategy is working hard for you, whether or not your dollar is, per se.

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