If you like foreign travel and expensive imports, this will hurt
Traders are eagerly awaiting Fed Chairman Ben Bernanke’s comments today, which many expect will hint at further quantitative easing.
In quantitative easing, central banks buy financial assets to inject money into the economy. Thus many economists simply call it “printing money” and the result is usually a weakening of the currency.
In support of the faltering economy, the Fed has already had two rounds of easing, dubbed QE1 and QE2, the latter of which occurred in 2010 and was credited with the recent stock market boom.
As the economy has faltered, the Tea Party Republicans have implicitly blocked any new stimulus on the basis of unaffordability, citing the deficit. Therefore, the Fed Chairman, Ben Bernanke is expected to use one of the few tools left, quantitative easing.
What Does This Mean for the Economy and for You?
It means a lower dollar and more expensive imports and foreign travel. Interestingly, even as Europe is in the throes of massive economic crises, the value of the Euro has remained strong at over $1.40.
Likewise, even though Japan’s sovereign debt was just downgraded by Moody’s to Aa3 – 3 notches below AAA, yen strength has remained. Similarly with the British pound.
The dollar will likely continue to fall as the U.S. continues “printing money” to inflate the economy, to make exports cheaper, and to devalue the massive and growing deficit.
As a prudent investor, you should begin to think about protecting yourself through purchasing other currencies, such as the Canadian or Australian dollar. You can do this if you travel abroad.
You may be able to open foreign bank accounts whe abroad, but be prepared to jump through hoops to do so.
Another solution is to use U.S. banks that have foreign currency investments. Everbank for example, offers WorldCurrency savings accounts and CDs in various currencies that pay interest based on existing rates in those countries.
Finally, you can purchase shares of a currency-based exchange-traded fund. Currency ETFs are offered by many financial institutions a variety of foreign currencies, where each share represents a fixed amount of the currency in question.
The key issue is that it is not too early to defend yourself against the dollar’s coming decline.
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