You’ve got a Swiss watch, an Italian suit, a Taiwanese-made digital device, and a German car. You’re a global citizen of an interconnected world. So why is all your money in U.S. dollars?
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You’re not alone if most, or all, of your assets are dollar based. Most Americans stick to their home currency when investing. But holding currencies other than the U.S. dollar can be a great way to reduce exposure to your local economy, increase your return potential, and hedge against risk. Here are three ways holding foreign currencies can help your portfolio.
Diversification
You wouldn’t invest all your money in one stock, would you? So why keep all your money in one currency?
A country’s currency is like a stock for the whole economy. Its value depends on things like how well the government is run, how much the economy exports to the world markets, and how well its central bank manages monetary policy.
When a country does well, those conditions can help support currency appreciation. For instance, after the 2020 pandemic, Mexico’s central bank raised rates aggressively while the economy rebounded. The Mexican Peso appreciated by 20% from March 2022 to August 2023.
Conversely, if an economy experiences turmoil, its currency may take a hit. For example, after the Brexit vote left a lot of open questions about the British economy, the pound sterling’s value declined by 15%.
Holding multiple currencies can help insulate against events that could have a big impact on any one single currency, allowing you to take advantage when one economy or currency is doing well.
Hedging
Worried about the deficit? Not sure all that pandemic stimulus was a good idea? The bottom line is nobody knows how various macroeconomic decisions of the past will actually impact the future. Having exposure to foreign currencies can help hedge against the unknown.
Ultimately, diversification and hedging go hand in hand. Broadly speaking, the U.S. dollar and most foreign currencies have an inverse relationship. Assuming you are a U.S. based investor, a weak dollar environment would typically lead to general appreciation of foreign currencies, which is why foreign currencies are considered to be a hedge against a weak dollar.
Since a weak dollar makes the cost of imported goods more expensive, foreign currencies are also seen as a hedge against inflation.
Growth
While the U.S. dollar is widely considered a stable or reliable currency, there may be other currencies around the world that can provide growth opportunities and stability over time as well. For example, the currencies of fast-growing, well-managed economies in Europe, Latin America, and Asia can provide attractive returns over time.
When the U.S. economy is under pressure, whether its financial, political, or otherwise, other global economies could be thriving. Investing in their currencies is one way to add potential growth to your cash holdings that you could be missing out by sitting solely in U.S. dollars.
How to access 20 global currencies with Battle Bank
Even if you like the idea of investing in foreign currencies, you may think it’s too complicated or expensive to get started. But at Battle Bank, we make it easy.
We give our banking clients two different ways to access 20 different foreign currencies.
Currency Deposit Account – is a liquid money market account denominated in a foreign currency allowing you to take advantage of real time currency and economic conditions in that country.
Currency CD – is a certificate of deposit denominated in a foreign currency typically with terms of 3, 6, 9, or 12 months. This means you’ll have to keep your money invested for that set period and you’ll earn interest based on the rate environment in that country. Given the time commitment of CDs, they generally appeal to those who are looking to take advantage of longer-term market and currency trends.
Diversify your cash globally
Cash is king, but not all currencies are managed equally. Diversifying your portfolio with foreign currencies can be a great way to hedge against economic events and shifts in government policy while also opening doors to find new ways to watch your investments grow.
