Archive for June, 2007

Reader Question: How to Hedge US Dollar Exposure?

June 3, 2007


The following question is from Debra:

I’ve been sitting on a large amount of US$ cash because I took profits on some US stocks last year. I’m out of the market presently (and crying over the declining value of my US dollars). I am wondering how best to hedge since I’m long-term bearish on the US$, any ideas? What do you think of buying some gold via GLD?

As the Canadian dollar hits levels not seen in thirty years, it must be tough to hold cash in US dollars. Investors in US equities are at least slightly better off because while the Canadian dollar has appreciated 10% in 2007, the US market has also gone up by roughly the same amount.

I’m not sure I have a good answer to your question because a lot depends on what your plans are for your cash holdings. For instance, if you are saving for a down payment one year or so down the road, you might as well flip a coin to decide if you want to convert to Canadian dollars now or later. I’ve seen forecasts that call for a loonie at-par and at least one that pegs it at 84¢ by the end of the year.

As far as I know, it is neither easy nor cheap for small investors to hedge their currency holdings. Historically, gold has usually rallied at times of US dollar weakness but the current rally, if anything, seems to be a story of Canadian dollar strength. Year-to-date, gold is up only 3% in USD terms and the euro has appreciated just 2% against the greenback. So, I am not sure how much of a refuge GLD will offer you in the future either.