To buy or not to buy US dollars

Question: I travel a lot, should I continue to buy and invest in US dollars?—Roy Amurao, businessman

Answer: I just blogged about an expert’s view that there was a bigger recession looming in America on my blogsite, www.randelltiongson.com. There seems to be contrarian views as to what to do with the US dollar and the expectations of the US economy, which will ultimately dictate the value of its currency.

The more popular view is that the US economy will not be going anywhere north anytime soon and that it is actually a ticking time bomb. The US debt has now ballooned to over $14 trillion. The US debt is so big that it is now about 98 percent of its gross domestic product. The economic managers of the US is now in a quandary as to how to get out of their perilous situation and it seems that it’s getting worse. The unbelievable stimulus packages and ridiculous bailouts are hurting them, whether they officially admit it or not. The result? A weakened US currency, even against our humble peso.

There is also a view that the US dollar now is undervalued and that it is a bargain to have. Notwithstanding economic uncertainties in the US, there are those advocating that the best time to buy them is now as some believe that the once mighty green bucks will appreciate in the near future. The US dollar, after all, is still the international currency and the US is still one of the strongest economies despite all of its troubles. A growing population, ample natural resources, ideal food production and a strong military might are a few reasons why we can’t discount the US and its currency. Further, one can notice that the yields on US dollar-denominated investment instruments are now giving higher yields, even against peso-based products.

So where should you position yourself? If your primary reason is travel, buying US dollars might be a good idea so you can hedge your cost and prevent further expenses brought about by foreign exchange risks. On the flip side, this will also mean that should the US dollar further depreciate, your travel funds will actually be higher. The risks can go both ways. I am going out on the limb here by recommending you to hedge some by buying dollars now, maybe about 40 percent of your estimated fund needs just to have a hedge position should the US dollar recover. This way, you will lock in partial cost and make ample provisions in your cost assumptions.

As to investing, I recommend you to be a tad cautious and not speculate too much on the dollars as further depreciation of the US currency is not entirely improbable. Maybe putting some percentage of your investment portfolio for speculation purposes may work but always remember the cardinal rule of investing, the higher the returns, the higher the risks. Diversification is always a prudent choice.

Hope this helps.

Randell Tiongson, RFP, is an advocate of Life & Personal Finance. He is a director of the Registered Financial Planner Institute (Phils.) and has over 20 years’ experience in the financial services industry. To know more about Registered Financial Planner (RFP) program, e-mail [email protected] or visit www.rfp.ph.