Save Yourself from the Dollar's Doom

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During the debt ceiling drama in Washington last month, and after the ensuing downgrade of U.S. Treasury debt by Standard & Poor's, most investors focused on the potential impact the moves would have on Treasury bonds and on the stock market. Yet largely forgotten in the turmoil was an issue that could have a much larger impact on both your investments and your personal finances for decades to come: the viability of the U.S. dollar as the world's leading reserve currency.

It's natural for most people to believe that the only time currency markets really have an impact on them is when they travel abroad. But over the long haul, continuing dollar depreciation could spell disaster for your financial survival.

Fortunately, financial innovation has made it much easier for you to protect yourself from this trend.

Are You Overexposed to U.S. Dollars?

Most people in the U.S. have huge exposure to the value of the U.S. dollar. Think about it: Workers get paid in dollars. Retirees get Social Security and pension benefits in dollars. Most bonds and stocks pay out investment income in dollars. Many people will go their whole lives without seeing a euro, yen, or peso.

But many of the things that we rely on in our everyday lives come from foreign countries, and as a consequence, currency exchange rates have a big impact on our costs. Moreover, when you combine exchange rates with lower labor costs abroad, you can tie the currency markets to outsourcing trends and the resulting loss of U.S. jobs.

As the overall economy gets more global, it makes sense for you to get more global in your personal portfolio as well. One way to do that is to reduce your exposure to the fate of the U.S. dollar by diversifying into other currencies. There are several ways to go about doing that.

1. Grab-and-go currency exchange

The obvious way to get foreign currency exposure is to go buy some. But shopping for foreign cash right next door to the duty-free shop is an expensive way to go. For one thing, most banks and currency exchange stores either charge big fees to trade your money or don't give you the best rates for your money. You can do better at a foreign ATM -- but that means you have to actually go abroad to get it.

In addition, once you have the cash in hand, you have to take steps to protect it. And worst of all, that cash won't earn you any interest. So while it gets points for simplicity, filling a briefcase with Brazilian reais or Swiss francs isn't the best solution.

2. Foreign currency bank accounts

A better alternative is to open a bank account in foreign currency. You can go directly to a foreign bank, but if you do, be prepared to run a gauntlet of questions and scrutiny. Dealing with two countries' regulations on banking can seem like an insurmountable obstacle course unless you find a banker who really wants your business. Unless you have substantial assets, the hassle may not be worth it.

A simpler solution is to use U.S. banks that offer foreign currency investments. For instance, Everbank offers WorldCurrency savings accounts and CDs in a variety of currencies that pay interest based on prevailing rates in the countries in question. The downside is that Everbank uses foreign exchange rates that include a spread that is typically within 1% of the market rate, meaning that if you convert back and forth as CDs mature, fees could add up. In addition, interest rates are sometimes far less than what you'd get from a foreign bank.

3. Currency ETFs.

A relatively new vehicle is the currency-tracking exchange-traded fund. You can find CurrencyShares ETFs in a variety of foreign currencies, where each share represents a fixed amount of the currency in question. These trade like stocks during the trading day and tend to move in lockstep with the forex market. With modest fees and the availability of interest for some currencies, currency ETFs can be a simple way to diversify your portfolio.

Give Your Money a Trip

Of course, putting all your money into foreign currency is just as risky as keeping everything in U.S. dollars -- and a whole lot less convenient, too, as long as you don't plan to leave the country and live abroad yourself. But having some cash cushion against a U.S. dollar disaster is worth considering, especially if you have enough saved up to justify the extra effort involved.

Motley Fool contributor Dan Caplinger loves collecting colorful foreign banknotes. You can follow him on Twitter here.


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80 Comments

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Fred Zak

Only the Government can take perfectly valuable paper, cover it with perfectly valuable ink, and make it totally worthless!

February 06 2012 at 8:44 PM Report abuse rate up rate down Reply
donut999

The world is stuck with the buck no matter how much luster it loses. If you do not think this is true, please explain the mass exodus to the 10 year treasury when it was clear the market was going to take a hit pushing the return below 2%. Billionaires, arab sheiks, and the proverbial chinese tycoon do not like investing for 10 years at 2%. There isn't any other sure money place to go. Would you like them to loan you some money at 2% interest?

August 22 2011 at 1:49 PM Report abuse -1 rate up rate down Reply
lenguss

The dollar has been 'doomed' before, notably under Carter. It survived and is the strongest currency in the world because the US is the strongest country. Let Caplinger flee to the Swiss franc, which has caused desperation in Switzerland. When we get rid of Obama the currency will become stronger, but hopefully not too strong which would denigrate our exports and increase imports which we have too much of anyway.

August 22 2011 at 1:01 PM Report abuse rate up rate down Reply
1 reply to lenguss's comment
donut999

Obama has nothing to do with how strong or weak the dollar is. It is about Fed policy of keeping the onite and window rates at basically zero and their recent promise to maintain the position for 2 additional years. Note, I called it a position, not a policy. The Fed is not making a "decision". The reason is simple. For the last 3 years, the Fed has had no choice but to give the banks and other financials an opportunity to earn their way out of the mess they are in and with a prayer hopefully absorb/dispose of the toxic assets on their balance sheets. And for good measure, have tacked on another 2 years out of necessity, not choice. I think there might be 52 folks in the U.S. that get this--at least it looks that way from reading these boards.

August 22 2011 at 1:56 PM Report abuse rate up rate down Reply
2 replies to donut999's comment
obama fools

so you dont think nobamas spend spend spen has anything to do with the dollar.,GO GET SOME MORE KOOL-AID.........

August 22 2011 at 2:36 PM Report abuse rate up rate down
savemycountry911

Libs love smoke and mirrors.

August 22 2011 at 3:41 PM Report abuse rate up rate down
aberdoink

most citizens of the USA are living payday to payday or unemployment check to unemployment check if they even get one and we are supposed to follow these guidelines? We don't even have two dimes to rub together and hope for a miracle I read of a person who robbed a bank of $1.00 so he could go to jail and get some medical care. So how do we take all these indiotic guidlines seriously.

August 22 2011 at 11:52 AM Report abuse rate up rate down Reply
doonooch

WE'RE SCREWED.

August 22 2011 at 8:34 AM Report abuse +1 rate up rate down Reply
Pllc15

Dan Caplinger has some good points. I was an ex-pat when the Dollar tanked in the early 90's and made a killing by virtue of the weakening Dollar at that time. You can't profit very much from FX rates offered by the banks here. Best to buy foreign equities with your wealth management agent.

August 22 2011 at 1:48 AM Report abuse +1 rate up rate down Reply
judithgrayson

well, i for one intend to purchase a wheelbarrow and put my dollars in that. at least i can push it over to the deli or the supermarket for a loaf of bread, a tin of coffee and some cheese.
otherwise, i will have to give them an etf, or my foreign currency or my gold bar. i dunno about your deli but mine doesn't take any of that stuff. nor does the supermarket.
hmmm. wonder if i can get the wheelbarrow up and down the escalator.

August 22 2011 at 1:21 AM Report abuse +1 rate up rate down Reply
1 reply to judithgrayson's comment
Setanta

all jokin aside--do the best you can,while you can on canned goods etc.

August 22 2011 at 1:27 AM Report abuse +3 rate up rate down Reply
bushsnitemare2

THE PARTY OF NO HAS GOT TO GO!!!!!!!!

August 21 2011 at 11:58 PM Report abuse -6 rate up rate down Reply
2 replies to bushsnitemare2's comment
Setanta

party of yes,
has caused distress....

and being they love their little nursery rhymes--hey hey HO HO --dem_O_crats have got to go ! hey hey HO HO..


pppsssssst.....spread it around...........ALL AROUND.......diMs lied and our economy DIED......

August 22 2011 at 1:32 AM Report abuse +8 rate up rate down Reply
2 replies to Setanta's comment
bushsnitemare2

HMMMM......71% OF THE AMERICAN PEOPLE STILL BLAME BUSH AND THE REPUBLICANS FOR THIS ECONOMIC NITEMARE, NO WONDER THE REPUBLICANS LOST BIG TIME IN 2008! ARE AMERICANS SICK OF THE TEA PARTY? ONLY 31% OF AMERICANS FIND THE TEA PARTY FAVORABLE.

August 22 2011 at 12:49 PM Report abuse +1 rate up rate down
savemycountry911

More Dem smoke and mirrors.

August 22 2011 at 3:43 PM Report abuse rate up rate down
savemycountry911

The party of no common sense.............the Dem party has to go.

August 22 2011 at 3:42 PM Report abuse rate up rate down Reply
Barry Harper

If we loose the ability to print more of our money ,when other counties don't want it ,because it's not worth the paper it's written on we're in deep **** ,and I'm not sure we're not there now .

August 21 2011 at 11:32 PM Report abuse +4 rate up rate down Reply
Dick Keane

here is the link to the presentation we gave to the Director, the Chief and the head counsel for Florida Office of Financial Regulations on April 22nd, 2011

http://www.cmkxshareholder.com/CMKX/Enough_is_Enough.html


I was with Cameron Shaw, who gives the presentation. The video is summarized in a 19 minute youtube clip.

Also your article today ( SPTIMES ) about the OFR, on a smaller scale is similar to the Matt Tiabbi story about the SEC and the Banks and the musical chairs played by the Lawyers.


Please also watch and read my article Wall Street Fails To Deliver http://www.SiriusNews.com/blog you can google the video Wall Street Fails to Deliver


I have in my hands a powerful movie not out yet about how the money was stolen on Wall Street and how the jobs have been lost. I hope you will spend 19 minutes of your valuable time to watch the Florida
presentation and then Wall Street Fails to Deliver.

I am the narrator to the movie Stock Shock ( June 2009 ) http://www.StockShockmovie.com

I will also play a big role in the upcoming movie out Sept 2011 called Radio Wars. http://www.RadioWars.com

here is my info, I hope you give me 1 hour of your time to meet in person and give you this movie so you can watch

please contact me

Richard Keane
St Pete Beach, FL

August 21 2011 at 11:20 PM Report abuse -3 rate up rate down Reply