The dollar has been falling ever since last spring when concerns about a world economic collapse started to fade. Since the stock market bottomed on March 9, the dollar buy sell has dropped by more than 15% against a basket of six important currencies, hitting its lowest level in 14 months. It’s anticipated that this pattern will last for a while. The dollar’s decline is due to a variety of factors. The biggest shift is the worldwide return of risk-taking among investors. In contrast, they jumped into longer-term bonds and short-term Treasury bills when the financial crisis worsened following the bankruptcy of Lehman Brothers in September 2008. T-bill yields had already been driven to zero by investors. In reality, they were paying the Treasury to keep their cash on hand.
Carry trades are being used more frequently by investment banks and hedge funds. They invest their low-interest borrowed funds 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 gain more money if the value of the dollar decreases. Some people worry that the large trade and fiscal imbalances in the US may lead to a decline in the value of the dollar.
Despite the belligerence from China and other countries, such a situation is extremely unlikely. In the foreseeable future, no other currency will be able to take the position of the dollar as the global reserve currency. China is also far too affluent for a collapse, holding vast amounts of Treasury securities worth roughly $1 trillion. In ten years, Gaffney asserts, there is absolutely no risk that the dollar will no longer function as the world’s reserve currency. The dollar has a floor since it is a reserve currency, but no one is certain where it is.
Managing the dollar’s slide
How can you take advantage of and guard against a weakening dollar? Start by favoring big businesses in both your own stock holdings and your mutual fund portfolio. Significant revenue and sales growth abroad is far more likely to occur for large organizations than for small ones. Don’t stop there, though. Spread out your bond holdings similarly. Select a global-diversified Loomis Sayles bond or a fund of foreign bonds. Gaffney and her co-managers established the fund 18 years ago, and today they have 28 percent of their assets invested in bonds with foreign currency denominations. The majority of that is in developing markets.
Since last spring, when fears of a global economic collapse began to subside, the dollar has been declining. The dollar has dropped more than 15% of its value against a basket of six major currencies since the stock market bottomed on March 9, reaching its lowest level in 14 months. It’s anticipated that this pattern will last for a while.
Investment banks and hedge funds are increasingly using carry bets. They make investments in bonds with greater yields using their low-interest borrowed money. How can you take advantage? of and guard against a weakening dollar? Start by prioritizing large corporations in your stock portfolio and mutual fund holdings.