Can I hedge the impact of the falling dollar?

John W. Schoen Senior Producer • Profile • E-mail

The recent slide in the value of the dollar has attracted a lot of attention from consumers who are worried about the impact on their buying power. If you’re paid in dollars and you’re buying products priced in dollars, so far the impact has been fairly mild. But others are getting hit a lot harder — especially Americans working and living abroad who are watching the dollar-denominated paycheck keep shrinking.

What can I do since I live overseas to help offset the dollar-euro rate? I have a good income and house paid for here but gradually buying power is being eroded, especially lately. My wife has her pension in euros, which helps a little, but mine is all in dollars. Do you see (the) dollar rebounding in future?
— Howard W., Rota, Spain

If you’re paid in dollars and buying products priced in euros, you pretty much take a pay cut every time the dollar declines against the euro. And if the dollar remains weak, Americans working abroad are eventually going to go back to the employers and ask for a salary adjustment.

No one knows where the dollar is headed from here. Forecasting the future value of a currency is about as easy as forecasting long-term trends in interest rates — which is to say, it can’t be done reliably. To the extent that the dollar tends to reflect imbalances in global trade and differences in growth rates, and to the extent that these imbalances ultimately get “corrected,” the dollar can be expected to recover some of its lost value. No one knows when that might happen.

For those of us here at home, the impact of the falling dollar has been less apparent. Since much of what we buy in the U.S. is made overseas, a falling dollar raises the costs of goods produced abroad and priced in currencies that are gaining on the dollar. It’s also helped push up the price of global commodities with a fixed value — like crude oil and gold. With buyers around the world bidding for the next barrel or bar with currencies like the euro, it costs more dollars to buy that barrel or bar than it did before the dollar weakened. One place American consumers are getting a break is China. Because the value of the Chinese yuan is loosely pegged to the dollar, the cost of Chinese goods hasn’t risen as quickly as goods priced in currencies that float against the dollar.

If you’re worried about your retirement savings, you could move some of it to euro-based assets. But with the dollar down so far, you risk locking in your losses for good. (There are other dollar hedges, but they get pretty complicated and expensive for small investors.) Still, no matter where the dollar is headed, it’s not a bad idea to diversify at least some of your savings across borders these days anyway.

Keep in mind that some “American” companies that are so diversified globally that they are also benefiting from the dollar drop. When GE or Microsoft (both parents of msnbc.com) goes calling in a foreign country, the lower dollar helps them two ways. First, everything they sell is essentially "on sale" — because a stronger local currency buys more in dollar terms. And when U.S. companies bring home profits earned in foreign currencies, they get a big pop from the currency translation. This is already showing up in the profits reported by large U.S. multinationals (and other smaller players with big sales in foreign markets.) So if your retirement funds are holding stocks in these companies, they’re getting a boost from the dollar’s slide.

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