Why having currency diversification is a MUST

In this article, we are presented with a chart displaying the percentage change of various global currencies against the US dollar over the past ten years. This chart serves as a stark reminder of the need to diversify risk away from your local currency.

The Dominance of the US Dollar

The US dollar, often referred to as the king of currencies, plays a central role in international trade. Its widespread use in transactions makes it the most dominant currency globally. Despite the emergence of cracks in the dollar’s dominance, it remains unlikely to change anytime soon. Therefore, it is essential to acknowledge the influence the US dollar has on other currencies and adjust your investment strategy accordingly.

Depreciation of Currencies

The chart highlights the significant depreciation of many currencies when compared to the US dollar over the past decade. Even in countries with solid economies, such as Brazil or Sweden, their currencies have depreciated by 55% and 42% respectively. The Japanese yen has seen a decline of 34% while the Australian dollar has fallen by 32%. These figures serve as a reminder that currencies continuously depreciate due to various issues in the global market.

Impact of US Dollar Borrowing

One crucial factor contributing to currency depreciation is US dollar-denominated borrowing. Many countries have taken on loans in dollars, and now with the dollar gaining strength, their local currencies must depreciate to ensure balance in outflows of money from their nations. This can lead to further instability in their economies.

Diversification is KEY !

Most individuals tend to have their assets heavily concentrated in their local currency. Whether it is real estate, stocks, or bonds, these assets are denominated in their respective currencies. The risk of this approach becomes apparent when we witness the depreciation of local currencies against the US dollar, as demonstrated in the chart.

To mitigate such risks, diversification is key. By investing in assets denominated in other currencies, you can safeguard your portfolio against the potential depreciation of your local currency. One option is to invest in overseas stocks or other assets abroad, ensuring a portion of your wealth is not tied solely to your local currency.

The Importance of Gold as a Hedge

Another effective hedge against currency risk is gold. Even when buying gold in your local currency, you are essentially purchasing an internationally-priced asset, not subject to local fluctuations. In the scenario where your currency depreciates significantly, the value of your gold holdings will rise proportionally, thereby safeguarding your wealth.

Gold acts as a hedge not only against currency fluctuations but also against potential changes in your local government. Political instability or policy shifts can have a drastic impact on your local currency. By holding gold, you create a buffer against such uncertainties, ensuring the preservation of your wealth.

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WEEKENDINVESTING ANALYTICS PRIVATE LIMITED is a SEBI registered (SEBI Registration No. INH100008717) Research Analyst