To Hedge Or Not To Hedge

By March 22, 2007Currency ETFs

There are a number of ways to hedge against a falling U.S. dollar. There are now ETFs that hold portfolios of euros, pounds, Japanese yen, Swiss francs, Mexican pesos, Australian dollars, Canadian dollars and Swedish krona, not all of these ETFs are likely candidates for appreciation against George W (the first George W).

In fact, the most likely success in appreciation could come from the Japanese yen. The economy is thriving and the interest rates are on the rise for the first time in more than a decade. That makes FXY attractive.

Yet FXY offers nothing in the way of yield. You need the yen to gain 10% from appreciation alone to pursue double-digit returns. In contrast, the Aussie dollar serves up a juicy 5% yield, and stands a good shot at picking up a few percentage points against our currency.

A smart hedge, then, might be a combo of FXA and FXY, giving a combined yield of roughly 2.75% and a shot at a combined appreciation of 5% or more.

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.

Leave a Reply