Tired About The Dollar? With an exchange rate breaking historic highs each week, it is worth considering alternatives within the financial sector to protect against the volatility of the US currency (or even see gains). See how to cover yourself.
Since February 28th the price of the dollar has broken historical highs and yesterday the rate closed at USD $5,630. The coronavirus, has caused heavy losses in the international markets, especially in the oil tanker, whose price has fallen US$15 in the last two weeks to US$45 a barrel.
With this type of nervousness, currencies of emerging economies suffer the most. Especially those of nations with high debt (such as Colombia, whose foreign debt is US$137,442 million, 43% of GDP).
People and companies use the dollar for their operations: importing, buying on the internet, making transfers abroad, etc.
And since January 2020 their costs have increased by more than 10%, as the exchange rate began the year at about $3,250 and is now almost $350 higher.
The problem is that there are no longer any historical references as to how much more the exchange rate can increase. Making the situation more acute for this segment. Fortunately, in the financial system there are alternatives to mitigate the effects of the dollar’s rise.
Exchange rate coverage.
Suppose you have to pay $1,000 in October for some product you need to import. Dollar can either go down, implying lower costs compared to the current rate, or go up, increasing costs.
For those who do not like this uncertainty and are tired about the dollar, they can resort to exchange rate hedging through derivatives. An effective way to take the vagaries of nature out of the game.
It is a contract in which one acquires the option, but not the obligation, to buy a certain amount of dollars at an agreed price. For example, with a financial entity you can set the exchange rate for the purchase of that $1,000 that will be needed in October.
If by this date the exchange rate registers a historical maximum again, there will be no problem, since the rate was already agreed: for months you have been sure how much you will have to pay for those dollars just by executing the option.
The central banks offers this exchange coverage service. At the time of the operation (the agreed date), whether or not you execute the call option, you must pay a premium (cost) that depends on different factors: the exchange rate on that date, the agreed rate, the volatility, the time of the contract and the interest rate. In addition, if a profit is made on this exchange rate hedge, a withholding tax is charged.
For companies (or individuals) the main benefit of this instrument is to guarantee their cash flow. That is, to be able to safely project how their income and expenses will be related. It is a key part of the strategic planning of any organization.
Saving in dollars.
For those who are saving to study abroad, or for any investment expenses in another country, they should consider opening a dollar account.
Especially at times like this when historical highs in the exchange rate are broken every week. In this way, instead of seeing savings in your currency due to the exchange rate effects (and inflationary effects that can be generated over time by the rise in the dollar), they can secure their resources by changing to the U.S. currency.
Central banks offer savings accounts denominated in dollar. These are really accounts that are abroad, in countries like Panama, Puerto Rico or the United States. Therefore, local branches serve as a kind of intermediary so that these financial instruments can be accessed and used easily (such as for payments and transfers).
They also offer a rate of return such as savings accounts in your own currency, where this money is freely available.
However, the minimum opening amount of this instrument can vary.
Investing in safe haven assets (gold).
Thanks to online platforms it is possible to invest in international markets from the comfort of your home.
Although the coronavirus has left multi-million dollar losses in markets. Such as the oil market, gold has reached historic highs of over US$1,650 per ounce. That is because investors consider gold a refuge asset., usually bought by in times of high uncertainty.
Thus, it is feasible to see investment in gold, or in another refuge asset, as a way to protect themselves.
In fact, it is a double protection, because investment in gold is denominated in dollars.
Collective Investment Funds (CIF).
It is one of the products within the financial system that offer a duality. A duality between savings and investment (low, moderate, or high risk).
Practically all large financial institutions offer CIFs that invest in international markets. Therefore, their returns are tied to foreign currency. Making it a quick and convenient option for investing abroad.
You can participate in the fixed income market, sovereign debt bonds, or variable income. Or shares traded on Wall Street. Minimum opening amounts are across the spectrum, from under $100,000 to over $20 million.
But in these times of high uncertainty, I recommend low-risk portfolios.
At the moment, no one knows for sure how much more the exchange rate will rise, but at least it gives some peace of mind that there are options to mitigate the risk in case the dollar is relied upon.