Re: Weakening US Dollar Hedge
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I'm actually not sure its trade weighted. It might just be short dollar in absolute terms. These are some of the questions I have, and I can't find out much.
Why would you want this to be a hedge against a fund of foreign currency/stocks?
I was thinking this could be genius as a hedge (counteracting my "life in dollars") against inflation, declining purchasing power, or perhaps as a way to maintain my relative wealth if I want to move outside the country for an extended period (England would be the likely destination).
With our outrageous debt levels, foreign military entanglements, oil dependence, and entirely fiat currency system...
I guess I just worry that the dollar will eventually be nearly worthless. Sometimes it already feels that no one really makes enough money to support a standard lifestyle here.
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you'd want to hedge against foreign stocks in which you invest to eliminate (or severely reduce) the extra volatility that currency risk introduces.
the dollar index has to be weighted somehow. currency is a 2 way street. being short the dollar must mean being long something else. how would they measure the fall of a dollar vs. nothing?
as a result, in order to get any hedge right, you have to know what you want to hedge against. if you want a hedge against realized inflation, buy TIPS. if you want to hedge against the dollar falling vs. another currency, go long the other currency vs. the dollar. if you are afraid of a dollar fall vs. a trade weighted basked (meaning who we trade with, and thus what we import), then going short the trade weighted index is what you want. that is probably the thing you're concerned about: the purchasing power of the dollar.
one thing that has propped up the dollar and financed our massively wide trade deficit is the disproportional desire of asian banks & commodity exporters to save in dollars (to the tune of $1.3 or so trillion). if you believe that faith will decline significantly, then a falling dollar would likely have to result in order to reflect the balance of payments situation we have gotten ourselves into.
Barron
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