Protecting yourself as an expat against a falling U.S. dollar

Dollar strength is a big deal for expats who rely on income from their portfolio and Social Security benefits, which are based in USD. This was a trying year for the dollar is its index dropped 10% from the March high as the government initiated major stimulus; there is a direct correlation between the two. Here, we will explore the impact on the dollar and how, as an expat investor, to protect yourself from a further decline.

During major financial shocks, the dollar is the world’s safe-haven asset. Global investors buy-up the dollar as a means of protection, bidding up the price. At the beginning of the Covid-19 recovery attempt, the dollar enjoyed the expected boost followed by a massive decline, which began as the U.S. launched a $3 trillion dollar stimulus package. This could be the start of a long-term USD decline as an additional stimulus is expected with no debt reduction strategy in sight.

Jeffrey Frankel, a former economic adviser to the White House and a professor at Harvard University said, “...regimes do change, posing a longterm rather than immediate danger to the dollar. People assume that nothing the US does could turn into a situation where the dollar loses credibility. But that’s wrong and you only have to look at Britain as a cautionary tale. Sterling used to be the world’s reserve currency but it lost its status, which shows that you can lose that exorbitant privilege.”^1 See below the dollar index and Federal Reserve Bank debt charts.

American expats are encouraged to keep their investments in the U.S. in order to simplify their tax reporting. Most Americans in Europe are limited to individual stocks and bonds as U.S. mutual funds and ETFs are not accessible, per rules created by the E.U. in 2018. This often results in over-exposure to U.S. dollar-based investments. Methods that may reduce your dollar exposure include finding foreign investments that trade on the NYSE or by increasing the cash balance of your local currency to fund expenses 1-2 years out. Owning real estate in your host country would also help reduce dollar dependence in the future.

Professional portfolio management should take your local currency dependency into consideration, especially if you’re taking income sourced in dollars. At Eureka Wealth Management, I help my clients manage their currency risk by integrating solutions in their portfolio. I also analyze retirement and research insurance solutions. Call for a free initial consultation at (760) 537-0791 or book a meeting online at eurekawealthmanagement.com.

Sources:

^1: FT 8/1/2020 “Greenback blues”