What does the falling dollar mean to you?

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What does the falling dollar mean to you?

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Over the past several months we have seen a steady decline in the value of the U.S. dollar versus other major currencies such as the Euro and the Yen. The weakness in the dollar is starting to have its impact.

 

For those traveling overseas, you will notice a significant increase in all travel related costs as you attempt to exchange your dollars into the local currency. Also, the cost of many items we import from overseas will be more expensive — from automobiles, to electronic equipment and soon. On the economic front there may be a continued gradual rise in interest rates as our Federal Reserve attempts to keep our Treasury rates competitive for foreign investors who, by the way, now own almost 50 percent of all U.S. government debt*. This will result in rising rates for money markets, certificates of deposits and other savings instruments and should help those on fixed incomes.

 

On the other hand, those who are holding variable rate debt such as personal credit cards, home equity loans, and other loans tied to the prime rate or other variable indexes can expect to see an immediate increase in the cost of their debt. While most of the impact so far has been on short term debt, it is likely that we will begin to see the impact on 15 and 30 year mortgages.

 

Here are some investment recommendations that may help with the effect of a declining dollar:

• Consider including within your fixed income portfolio inflation hedging securities such as TIPs

(Treasury Inflation Protected) bonds and corporate inflation protected notes. Both of these types of bonds have their interest rates tied to changes in the CPI (Consumer Price Index).

• Maintain a reasonable exposure to both International stocks and bonds, both of which have benefited recently from the decline in the dollar.

• Consider including within your total portfolio a modest exposure to alternative investments that have

a history of hedging against rising inflation such as gold and precious metals, commodities, and real estate.

 

Remember, investment decisions should be based on your individual goals, time horizons and tolerance for risk.

*Washington Post, July 6, 2004

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