ETFs For The Dollar Bull

October 06, 2014

The Street seems to be clamoring for long-dollar plays. Maybe you’re already covered.

The headlines this weekend were full of hand-wringing about the dollar. The dollar’s stronger, so we’re all doomed. The dollar will crash, so were all doomed. You can pretty much pick any side of a currency argument, and there will be someone telling you it’s a sign of the end-times.

But the reality for most investor portfolios is actually nuanced, and if my inbox is any indication, pretty widely misunderstood.

Let's get back to basics and consider what currency really means in your portfolio.

You’re In A Dollar World

Most American investors are already extremely long the dollar. We get paid in dollars. Our biggest assets—our houses, our cars—are already denominated in dollars. If you’re like most investors, your home bias in your portfolio is extreme, and something like 80 percent of your financial assets are also in dollars—U.S. stocks, dollar-denominated bonds.

Honestly, that’s not necessarily terrible. After all, if you put your pension-fund-manager hat on, most of your liabilities are also denominated in dollars. You have to pay your mortgage and your grocery bill in dollars. You’ll likely send your kids to a U.S. college, and your hospital will charge you in dollars if you get sick.

Why then should you be concerned about the dollar? Because we live in a global economy.

While it’s true your mortgage may be in dollars, when you go to buy a new car, a lot of the parts have come from outside the country. Imagine you’re buying a widget for your car that cost a dollar today, and was shipped from Brazil. If the real collapses and the dollar soars 100 percent relative to the real, well, in order to get the same widget, you now only have to pay 50 cents. Your dollar is 100 percent more valuable.

But it goes both ways. Say your company makes video games. You want to sell your video game to gamers in Brazil. Well, today your video game—which you’d like to get $60 for—costs that Brazilian gamer about 140 teal. If the dollar soars against the real, that game’s going to cost him 280 reals.

Unless that Brazilian gamer got a rather monumental raise in local currency terms, you’re probably out of luck, and your company just won’t make those sales to Brazil.

A Tisket A Basket

The most common way to look at “how’s the dollar doing” is to look at the US Dollar Index. It’s a measure of the dollar versus the six big currencies: the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.

In reality, the euro dominates, with nearly 60 percent of the basket, with less than 10 percent weights to the yen and pound as well. It’s not an entirely irrational basket, but it probably downplays the importance of Asian currencies. Still, it’s the standard. And the value of the dollar does fluctuate against this basket over time … a lot:

 

USDX

 

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