Most people don't have the time to follow exchange rate fluctuations. If you don’t know whether or how fast the dollar will strengthen or decline against other currencies, the best way to protect yourself is to be flexible and diversified.
- In your financial portfolio, make sure you have a mix of both domestic and international mutual funds, as well as commodity funds that include oil, real estate and metals. Talk to a financial adviser to help develop a well-diversified portfolio that is within your desired risk and return goals.
- In your career, never count on a lifetime job...it could be outsourced overseas. Frequently assess and upgrade your skills, and keep your resume current. Think of yourself as a freelance worker, selling your skills for the highest dollar, even if you are a W-2 employee.
- Keep enough cash on hand to pay for six months of living expenses, if needed. If you are in credit card debt, make getting out your number one priority.
Protect Yourself from a Dollar Decline, or Even a Collapse
A dollar decline is inevitable. The U.S. dollar rose 15% in 2014, as forex traders abandoned the euro thanks to the ongoing Greece debt crisis. The dollar is seen as a safe haven during times of uncertainty. It's also a vote of confidence in the strength of the U.S. economy, which recovered from the Great Recession better than the European Union or China. However, the high U.S. debt continues to exert downward pressure on the dollar. As the rest of the global economy improves, forex traders will move out of the dollar and back into the euro and other currencies.
The best way to protect yourself from a weakening dollar is to boost your asset allocation in foreign stocks, bonds and even some currencies. As the dollar falls, these investments will rise. You could also invest in companies which were hurt by the strong dollar, such as exporters. Their earnings should improve as the dollar weakens.
Although a total dollar collapse is unlikely, it's not impossible The British sterling was the world's global currency until World War II, and the dollar could one day be replaced by the euro, yuan or even a bitcoin-type currency. A sudden collapse would be cataclysmic, but you can still take steps now to protect yourself.
First, keep your assets liquid, which means don't own too much of your net worth in real estate, art or other things that would be difficult to sell in a hurry. Gold is good to have on hand, as it's accepted everywhere, but make sure you don't hoard more than you can easily carry. For more, see How to Protect Yourself from a Dollar Collapse.
Protect Yourself from a Strengthening Dollar
What if the dollar strengthens? Increase your asset allocation to hold more U.S. stocks, especially small cap that isn't hurt as much by a strong dollar. It wouldn't hurt to have more in cash, to take advantage later of cheaper prices in foreign investments. Large multi-national exporting companies will be hurt. Since exports contribute 13% to the U.S. economy, this could ultimately slow growth.
Protect Yourself from Specific Currency Changes
If you are traveling to Europe next summer, you can lock in the favorable euro to dollar conversion rate by buying your foreign currency now. More sophisticated investors can purchase a currency swap, or purchase a currency futures contract. Article updated March 11, 2015.
Exchange Rates FAQ
- What Are Exchange Rates?
- How Do Exchange Rates Work?
- How Does the Government Regulate Exchange Rates?
- How Do Exchange Rates Affect My Personal Finances?
- How Can I Protect My Personal Finances From the Impact of Exchange Rates?