The Dollar and Other Currencies

The U.S. dollar has been strong in the last couple of weeks, at least compared to other currencies.  The Euro has done poorly and probably for good reason.  The PIIGS countries are a mess and the European Central Bank is risking a collapse of the euro by bailing out the irresponsibility of European governments.  The collapse of the euro is unlikely to happen overnight, but it will slowly degrade as people realize it is in trouble.  It may take a year or it may take 10 years.

It is surprising that people still flock to the U.S. dollar when uncertainty hits.  This will change eventually, but it may take longer than what it seems like it should.  For some reason, people still have some faith in the U.S. dollar and some put their money there when times get tough.  Look at the fall of 2008 when the stock market plummeted and all of these other events were happening.  Even with a giant bank bailout from the Fed, the dollar still did well during that time.

When it comes to investing, I don't think investing in other currencies should be a major part of your portfolio.  My favorite mutual fund, PRPFX, somewhat mimics the permanent portfolio as described by Harry Browne.  However, PRPFX does invest a little portion in foreign currency, particularly the Swiss franc.  There is nothing wrong with this because it is a small portion and the fund is so well balanced.  But generally speaking, I don't see the need to invest in foreign currencies.

If you want diversification from the dollar (or whatever currency you use for your income and expenses), then  hard assets will serve you fine.  Gold in particular is really the best hedge against a falling currency.  Other things like silver and oil can also do well, but gold is probably the best.

Just to be clear, there is nothing wrong with speculating in foreign currencies, but it should be seen as speculating.  Long-term, I don't see why you would choose to invest in foreign currencies.  Yes, the dollar is a bad bet long-term, and it will eventually lose its status as the reserve currency of the world.  But, why would the yen, the euro, or anything else be any better?  They are all fiat currencies and can be debased by governments and central banks.  That is why they should not serve as part of your long-term investment portfolio.  You should leave foreign currencies for speculation with money that you can afford to lose.