TRICKLE DOWN IMPACTS
In addition to adding diversification to a portfolio, currencies can be used as a hedge against cost increases from another country. For example, through the early part of the 2000s, as the value of the euro rose against the U.S. dollar, importers of products from Europe had to pay higher prices in U.S. dollars to purchase the goods. Higher prices that were in turn passed along to consumers.
Let’s say a container full of widgets costs 100,000 euros from the manufacturer. In the early 2000s, the euro traded as low as $0.90 per euro, so the importer would have paid $90K for the container. Later in the decade, the euro was priced at $1.50 U.S. (and higher) per euro, so that same container would have cost $150K. This is a quiet but important increase in cost to the consumer.
Many investors use currencies to hedge against just these types of price impacts. In the scenario above, consider a situation in which an investor had previously invested in the euro. That investor could have utilized this gain on the currency, and their investment, to help offset the price increases incurred domestically on items imported from Europe.
A FEW FINAL WORDS, IN PLAIN ENGLISH
What we’re talking about here is not the same as foreign currency trading, or forex as it’s often called. Forex traders speculate on short-term market moves. It’s risky by nature and often unsuccessful, though some do make it work. With currency investing, we’re striving for a stronger diversification strategy that has the potential to reward us with both monetary returns and a hedging solution.
While this may or may not be the right thing for you, many investors do take advantage of currencies when building their portfolios, and many have been very pleased with the results.