Sunday, October 4, 2009

Diversifying from the U.S. dollar

Seasoned U.S. investors generally grew up in a period of worldwide economic dominance by the United States. For the past 2 decades, or more, investors of all countries purchased U.S. investment assets and hard assets (like real estate) because the U.S. was seen as the economic world leader. The U.S. dollar was the reserve currency of the world (ie. the default currency for crossborder transactions and the safe haven currency in times of turmoil).

The economic landscape seems to be changing. Economic growth in the U.S. going forward may well lag that of the rest of the world, particularly emerging markets. Fiscal budget deficits in the U.S. and resultant borrowing demands may put upward pressure on interest rates and downward pressure on the dollar. Worldwide investors may sell U.S. dollar denominated holdings to create the funding for diversifying into other areas of the world.

If things turn out as discussed above, the ones to reduce their dollar exposure earlier will fare better than those who continue to be significantly overweight the dollar. There will certainly be periods of U.S. dollar strength, however those who continue to hold the vast majority of their investments in U.S. dollar denominated holdings may find themselves suffering poor relative performance as compared to the rest of the world over the long-term.