How Can Retirees Benefit from a Weakening Dollar
by Shane Flait, ©2011

Since June 2010, the dollar has been weakening with respect to the euro. The euro is the currency of countries in the European Union and because of that it, carries a good deal of weight in global economics. In June 2010 alone, one euro started out costing $1.26 and has more or less risen to $1.46 as of April 2011. What does this mean to retirees and travelers - and how can they benefit?

Travelers

Retirees do a lot of traveling. Traveling to Europe means paying for european hotels, rentals, dinners, entertainment, and of course gifts to bring home – each with its own price in euros. With the dollar weakening relative to the euro, you need to use more of your vacation dollars to buy the same amount of euros. And you need to buy euros to pay for all those European travel-related costs. That makes it more expensive for Americans to go to Europe. So, fewer Americans will choose to visit Europe.

On the other hand, Europeans have the reverse situation if they travel to America. Their allotted vacation money in euros will buy even more dollars so they can do more or enjoy a less expensive visit to America. So, more Europeans will visit America. 

Foreign Investment in the America

Likewise, the weakening dollar makes it more likely that Europeans (both individuals and corporations) will expand their investment in the United States. They’re better suited to make acquisitions of American-based businesses and real estate because a favorable exchange rate for foreigners can make U.S. investments a bargain. When the Japanese yen traded at record highs against the dollar back in the 1980s, Japanese firms made significant purchases of real estate - including the world-renowned Rockefeller Center.

How can Americans benefit?

If you do travel to Europe, make sure you get the best exchange rate for your dollar. Do this by making purchases overseas using a credit card – not cash. The credit card companies tend to negotiate the best rates and the most favorable conversions because they do such a high volume of transactions.

 

If you must travel, then travel where they use the dollar. That’s of course in the U.S., but it’s also true of Panama! Most countries in the Americas are still a good bargain. Doing so will save you money.

The increased foreign and American travelers in America – triggered by the weakening dollar –should bolster American-based travel and entertainment-related industries such as hotels, car rentals, and entertainment and theme parks. Any investment you make in any of these industries may due well over the coming year.

Foreign investment should help offset softening in parts of U.S. real estate market. Those parts such as vacation homes/ resort areas, and large business-buildings are most attractive.

Americans can invest in Foreign Securities to preserve value

You can take advantage of a weakening dollar by investing in foreign securities. That’s because they’re foreign securities are denominated in – and therefore bought and redeemed – in that foreign currency.

So, if you bought a foreign security dominated in euros with your dollars in June 2010 when a euro cost $1.26 and sold it in April of 2011 when a euro cost $1.46, you’d have made 15% on your dollar investment even if that foreign security paid no interest, no dividends, and didn’t increase its value in euros! Of course, an increase in any of these would add to you’re overall gain in dollars.

There are several different ways to invest your average retirement plan outside the dollar. You can gain instant diversification out of the dollar simply by buying foreign stocks, bonds, mutual funds, ETFs, etc. Just by buying these foreign securities, you gain exposure to currencies that are increasing against a weakening dollar.

If you purchased a euro CD with your retirement plan and the euro rose 3% versus the dollar (i.e. the dollar weakened by 3%), then you’d gain that 3% on your initial investment. Plus, you’d get the average interest rate on ‘euros’ that your euro CD was paying.

Remember, though, that a rise in the dollar rises against your foreign currency, will subtract that percent of rise from whatever gain your foreign investment produce in its own currency. So you could possibly lose some of your initial investment. So stick with the long term trends.

 

It appears that the dollar is in a weakening trend versus the euro. You might as well safeguard some of your holdings by diversifying to foreign holdings of one sort or another.

 

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