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i've thought about this issue a lot: whether/when/how to get out of the dollar. for the moment, i will just address "how." i see 3 alternatives to the dollar:
I. currencies-
A. form
1. via direct conversion of cash to foreign cash. in amounts up to $100k this can be in the form of an fdic insured cd at everbank.com there are also foreign currency accounts available at banks, at interactivebrokers, probably elsewhere
2. via the etf's available for the euro, the pound, the loonie, etc. [fxe, fxb, fxc, etc]
3. via futures
4. structured notes - czj is a citibank structured note maturing jun 08 with 5x leveraged exposure to the won, the singapore and taiwan dollars, the baht and the rupee. there is another citi note which substitutes the aussie for the singapore dollar. IF ANYONE KNOWS OF ANY OTHER, SIMILAR, INSTRUMENTS, I WOULD REALLY LIKE TO HEAR ABOUT IT.
B. which currencies?
1. euro- represents the "likely suspect" for central bank diversification, and in fact has been increasing in its presence in cb portfolios. the euro is vulnerable to internal eurozone political strains - italian and french politicians are frequently taking pot-shots at the european central bank's policies, and such tension is likely to increase if global growth slows or reverses. on the other hand, the euro pays a non-zero interest rate and has increasing support from non-european cbs.
i think the euro is a strong alternative to the dollar for the short to intermediate term. if the euro reaches 1.5 dollars within the next few years, there will be huge political pressures created - so that might might provide an upside exit point. if it appreciates more slowly there is no predictable target at this time.
2. yen - the 3rd of the 3 major global currencies. there is no etf available, and the yen pays approximately nothing in interest along the whole yield curve. the bank of japan has opposed appreciation of the currency, and the ongoing flow of the yen carry trade - the continuously increasing borrowings in yen which are then converted to other currencies for investment - has created another headwind for the currency. central bankers who have discussed currency "diversification" have not usually mentioned the yen by name, only the euro specifically and "other currencies" in general.
should the carry trade reverse, e.g. in a panic rush to liquidity accompanying debt liquidation, the yen will rise strongly. but such moves will be slowed by boj actions. if there is a u.s. recession which is consumer led, a distinct possibility in the face of huge consumer debt and a declining housing market, the diminution of u.s. consumption of japanese exports will reduce the boj's incentives to keep the yen weak relative to the dollar. of course, in the absence of a sharp increase in demand elsewhere in the world, even those reduced exports might be seen as extremely important to maintain. if the dollar continues to decline is a slow and non-volatile way, however, asian domestic demand might mature enough to provide alternative markets.
conclusion re the yen: some yen futures options might provide insurance against some disaster scenarios, but the yen doesn't seem to provide a good alternative for capital at this time. should the carry trade start unwinding in a steady fashion, perhaps because of a general retreat from dollar-based investments, the yen will become attractive.
3. the pound - i don't know enough to comment. i have some money in fxb, on the recommendation of a service i follow.
4. swiss franc- the swissie has, along with the yen, been the victim of a carry trade because of low swiss interest rates. i suppose a position in fxf - the swiss franc etf - would provide some "carry-unwinding" insurance value.
5. the canadian dollar. as a diversification from the dollar, the loonie is supported by its natural-resource based economy, but undermined by its dependence on the u.s. economy. it has taken a hit lately because of changes in the tax treatment of canadian income trusts. canadian energy investments, in particular, look more like energy than like currency plays in my opinion, but they will tend to be swept into broad movements of the canadian equity exchanges.
6. the swedish krona, mexican peso - also available as etfs. beats me. any comments, anyone?
7. some other currencies are available as futures and at everbank.
II. global bond funds
A. closed end funds - gim, fco, fax, tei.... i recommend etfconnect.com as a site for research on these and others. these funds have some duration, and so are interest rate sensitive to a greater degree than cash deposits.
B. open end funds - e.g. plmdx, pfbdx and many, many others.
if anyone has comments on the particular pros and cons of open- or closed-end global bond funds, i'd like to hear them.
III. commodities
A. precious metals - likely the best alternative to the dollar. as precious metals become remonetized they represent an increasingly attractive long term alternative not just to the dollar, but to all fiat currencies. this is because i expect inflation in all currencies, especially as cb's try to moderate the strength of their currencies against the dollar. although cb gold hoards overhang the market, the surplus countries' cb's are not big holders of gold. in fact, they may wish to "diversify" some of their holdings into gold. gordon brown's gold sales for the bank of england marked the bottom for the metal - i don't think other treasury ministers want to follow his lead. in fact, it is interesting to note that although western cb's tend to denounce gold as a mere relic, they are for the most part still holding on to their hoards.
silver appears to have more upside potential at the cost of higher volatility. in general we can expect significant volatility in both gold and silver.
this year there may be a sell off of gold to 550, or even 500, which i think would provide a great buying opportunity at the cost of the maalox moment it would also provide.
B. energy - likely to hold value over the long term, but also subject to major volatility. a u.s. recession would likely lower global energy demand enough to seriously drop prices, unless the dollar drops so much that the currency move is larger than the shift in supply and demand.
energy resources in politically stable locations are worth a premium because of the geopolitical risks to which oil is especially subject. for example, if pakastani president mussharef dies tomorrow, the potential for political chaos, with its additional issues of securing pakistan's nuclear arsenal, are quite stunning. if mubarek of egypt dies tomorrow, there is no clear successor, and the strengthening muslim brotherhood could attain power and abrogate egypt's peace with israel, etc. i have no doubt that anyone reading this can easily create a dozen scenarios which involve risk to middle eastern oil supplies. aside from canadian energy trusts, i am interested in hearing about any other energy plays on resources in politically stable locales. an alternative is to own oil per se, by buying uso, the oil etf.
C. industrial metals and agricultural commodities - there are long term arguments for both types of commodities, mostly centering around increased demand from china, india, et al. agriculturals are also indirect plays on water, as each e.g. bushel of wheat incorporates a significant water input. again, there will be major volatility. these can be played via etfs, such as dbc, via open ended commodity linked mutual funds, such as pcrix, as well as via futures and via equity in producers, processors, etc.
I. currencies-
A. form
1. via direct conversion of cash to foreign cash. in amounts up to $100k this can be in the form of an fdic insured cd at everbank.com there are also foreign currency accounts available at banks, at interactivebrokers, probably elsewhere
2. via the etf's available for the euro, the pound, the loonie, etc. [fxe, fxb, fxc, etc]
3. via futures
4. structured notes - czj is a citibank structured note maturing jun 08 with 5x leveraged exposure to the won, the singapore and taiwan dollars, the baht and the rupee. there is another citi note which substitutes the aussie for the singapore dollar. IF ANYONE KNOWS OF ANY OTHER, SIMILAR, INSTRUMENTS, I WOULD REALLY LIKE TO HEAR ABOUT IT.
B. which currencies?
1. euro- represents the "likely suspect" for central bank diversification, and in fact has been increasing in its presence in cb portfolios. the euro is vulnerable to internal eurozone political strains - italian and french politicians are frequently taking pot-shots at the european central bank's policies, and such tension is likely to increase if global growth slows or reverses. on the other hand, the euro pays a non-zero interest rate and has increasing support from non-european cbs.
i think the euro is a strong alternative to the dollar for the short to intermediate term. if the euro reaches 1.5 dollars within the next few years, there will be huge political pressures created - so that might might provide an upside exit point. if it appreciates more slowly there is no predictable target at this time.
2. yen - the 3rd of the 3 major global currencies. there is no etf available, and the yen pays approximately nothing in interest along the whole yield curve. the bank of japan has opposed appreciation of the currency, and the ongoing flow of the yen carry trade - the continuously increasing borrowings in yen which are then converted to other currencies for investment - has created another headwind for the currency. central bankers who have discussed currency "diversification" have not usually mentioned the yen by name, only the euro specifically and "other currencies" in general.
should the carry trade reverse, e.g. in a panic rush to liquidity accompanying debt liquidation, the yen will rise strongly. but such moves will be slowed by boj actions. if there is a u.s. recession which is consumer led, a distinct possibility in the face of huge consumer debt and a declining housing market, the diminution of u.s. consumption of japanese exports will reduce the boj's incentives to keep the yen weak relative to the dollar. of course, in the absence of a sharp increase in demand elsewhere in the world, even those reduced exports might be seen as extremely important to maintain. if the dollar continues to decline is a slow and non-volatile way, however, asian domestic demand might mature enough to provide alternative markets.
conclusion re the yen: some yen futures options might provide insurance against some disaster scenarios, but the yen doesn't seem to provide a good alternative for capital at this time. should the carry trade start unwinding in a steady fashion, perhaps because of a general retreat from dollar-based investments, the yen will become attractive.
3. the pound - i don't know enough to comment. i have some money in fxb, on the recommendation of a service i follow.
4. swiss franc- the swissie has, along with the yen, been the victim of a carry trade because of low swiss interest rates. i suppose a position in fxf - the swiss franc etf - would provide some "carry-unwinding" insurance value.
5. the canadian dollar. as a diversification from the dollar, the loonie is supported by its natural-resource based economy, but undermined by its dependence on the u.s. economy. it has taken a hit lately because of changes in the tax treatment of canadian income trusts. canadian energy investments, in particular, look more like energy than like currency plays in my opinion, but they will tend to be swept into broad movements of the canadian equity exchanges.
6. the swedish krona, mexican peso - also available as etfs. beats me. any comments, anyone?
7. some other currencies are available as futures and at everbank.
II. global bond funds
A. closed end funds - gim, fco, fax, tei.... i recommend etfconnect.com as a site for research on these and others. these funds have some duration, and so are interest rate sensitive to a greater degree than cash deposits.
B. open end funds - e.g. plmdx, pfbdx and many, many others.
if anyone has comments on the particular pros and cons of open- or closed-end global bond funds, i'd like to hear them.
III. commodities
A. precious metals - likely the best alternative to the dollar. as precious metals become remonetized they represent an increasingly attractive long term alternative not just to the dollar, but to all fiat currencies. this is because i expect inflation in all currencies, especially as cb's try to moderate the strength of their currencies against the dollar. although cb gold hoards overhang the market, the surplus countries' cb's are not big holders of gold. in fact, they may wish to "diversify" some of their holdings into gold. gordon brown's gold sales for the bank of england marked the bottom for the metal - i don't think other treasury ministers want to follow his lead. in fact, it is interesting to note that although western cb's tend to denounce gold as a mere relic, they are for the most part still holding on to their hoards.
silver appears to have more upside potential at the cost of higher volatility. in general we can expect significant volatility in both gold and silver.
this year there may be a sell off of gold to 550, or even 500, which i think would provide a great buying opportunity at the cost of the maalox moment it would also provide.
B. energy - likely to hold value over the long term, but also subject to major volatility. a u.s. recession would likely lower global energy demand enough to seriously drop prices, unless the dollar drops so much that the currency move is larger than the shift in supply and demand.
energy resources in politically stable locations are worth a premium because of the geopolitical risks to which oil is especially subject. for example, if pakastani president mussharef dies tomorrow, the potential for political chaos, with its additional issues of securing pakistan's nuclear arsenal, are quite stunning. if mubarek of egypt dies tomorrow, there is no clear successor, and the strengthening muslim brotherhood could attain power and abrogate egypt's peace with israel, etc. i have no doubt that anyone reading this can easily create a dozen scenarios which involve risk to middle eastern oil supplies. aside from canadian energy trusts, i am interested in hearing about any other energy plays on resources in politically stable locales. an alternative is to own oil per se, by buying uso, the oil etf.
C. industrial metals and agricultural commodities - there are long term arguments for both types of commodities, mostly centering around increased demand from china, india, et al. agriculturals are also indirect plays on water, as each e.g. bushel of wheat incorporates a significant water input. again, there will be major volatility. these can be played via etfs, such as dbc, via open ended commodity linked mutual funds, such as pcrix, as well as via futures and via equity in producers, processors, etc.
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