Dealing With the Fallen US Dollar

It’s all over the news. The US Dollar fell against the Euro, British Pound, Canadian Dollar and other major world currencies. The recent Yahoo! Finance poll with more than 130,000 votes shows that people think it will go even lower a year from now.

About 3 years ago, in the end of 2004, there was also a lot of talk about the weak US Dollar. At that time the US Dollar:Euro chart looked like this:

The US Dollar dropped 3 years in a roll, from close to 1.20 Euros in 2002 to 0.75 Euros in 2004, down 35%. Back then, similar to what’s happening now, there was a lot written in the press on the US Dollar’s free fall and how one could profit from or protect losses on the falling US Dollar. PIMCO, the mutual fund company known for managing bonds, started an unhedged foreign bond fund in early 2004. An unhedged foreign bond fund benefits from the dollar’s decline with little credit risk. The fund was an immediate success. It returned 12.7% in its first 8 months. For a bond fund, that’s a lot.

Amongst all the talk of the “twin deficits” causing the decline of the US Dollar and how people could protect themselves from the falling dollar, people sought after “diversification” schemes. The PIMCO unhedged fund, tickers PFUIX (institutional shares) and PFBDX (no-load D shares), seemed to be a good choice.

Right after the fund became popular though, the US Dollar stopped going down. Alas, the dollar went up 14% against the Euro the next year. The PIMCO fund promptly lost 9% in 2005, giving up almost all of the gain from the previous year. People who bought in the end of 2004, after the talk of the falling dollar became prevalent, didn’t break even until two and half years later.

I’m one of those people. I still have money in PIMCO Foreign Bond Fund (Unhedged) Institutional Shares, ticker PFUIX. The fund is up 10% this year because of the fallen US Dollar. This diversification venture earned me an average annual return of 2.4% over nearly 3 years. Money left in a money market fund would have earned more.

I don’t necessarily regret that I bought the PIMCO fund 3 years ago. If the US Dollar keeps falling, maybe it will go up another 10% next year and every year thereafter. I’m giving this example from my personal experience to show that it’s far from certain that the US Dollar will continue falling. If you are going to “do something” about the falling US Dollar, you have to be prepared that it may not turn out the way you think it will.

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