Hedging Against Dollar Decline

June 11, 2021


By Tim Courtney, Chief Investment Officer

While most of us exchange U.S. dollars regularly, we don’t often think about the value of our currency unless we are traveling outside the U.S. We read about other currencies, which have seen large declines or cryptocurrencies riding wild swings, but the U.S. dollar has been relatively stable. It has also been aided by the size and reach of the U.S. economy across the globe.

In the last 12 months, the dollar is down about 7% against a basket of other currencies, but this kind of movement is not unusual.1 Over the last 50 years, the dollar has moved higher and lower but, in total, has fallen about 25%2 against that basket as other economies and currencies have grown in importance. While it has only averaged a 0.5% decline per year over five decades, a potential long-term decline is one risk that dollar holders face.

Another related risk is inflation as it also reduces the purchasing power of a dollar over time.  As Jeremy Siegel shows in the chart below, the dollar now purchases less than 5% of what it could purchase 90 years ago.3



For the past decade, inflation has averaged 1.75%,4 a manageable level and much lower than what the U.S. experienced in the late 1940s and 1970s. However, the Federal Reserve has already stated its intention to let inflation run above its 2% target.5  Additionally, there have been many recent comments from influential economists stating that higher inflation may be necessary to fully heal the economy.6 This is a potential risk for financial assets like stocks and bonds.

There are several ways we may hedge against the risk of dollar decline or inflation as investors.  Some of these include:

1. Real assets: These are tangible assets such as real estate, equipment, gold and other commodities. Gold has historically maintained its purchasing power and can be a good long-term hedge.

2. International investments: Assets outside of the U.S. and denominated in other currencies offer another level of diversification to dollar decline. Having assets denominated in other currencies or companies that generate earnings in currencies other than the U.S. dollar can help provide some diversification against dollar decline.

3. Stocks: Stocks have historically been a good hedge for inflation over time as growing earnings can at least partially offset the effects of inflation. We may also consider utilizing certain stocks such as material producers that better weather inflation.

Cryptocurrencies have recently been a popular way to hedge against dollar risk. However, because of their large price swings, they haven’t been shown to be a reliable store of value yet —  one characteristic that is necessary for money.

As most of us spend and are paid in dollars, we want to see policymakers be good stewards of the dollar’s value. However, there are steps we can take to hedge that risk should the dollar weaken or inflation accelerate. If you have any questions, please call your Exencial advisor.

1. Bloomberg (1/25/21) — The dollar’s crash is only just beginning
2. Yahoo! Finance (06/11/21) – US Dollar/USDX Index
3. Jeremy Siegel (updated through 2017) — Stocks for the Long Run
4. US Inflation Calculator (data as of 6/7/21) — Historical inflation rates: 1914-2021
5. NBCNews.com (8/27/20) — Fed will let inflation rise and target jobs
6. Business Insider (5/8/21) – Nobel prize-winning economist Paul Krugman on inflation

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