Help a Reader: Currency Hedging

Here's an email I recently received from a reader:

My wife and I are planning a trip to Europe next summer. With all the tumult in the market and perpetually pending FOMC interest rate cuts, the dollar seems destined to continue its downward plunge against other major currencies (particularly the pound and the euro, the currency of the places we're look at going). So, I'm seriously considering a currency hedge for the items that I can't pay for in USD, or even those things that I could pay for in the foreign currency (like spending money, or B&B nightly rates)... Do you have any advice on where to begin even researching how best a US person could do that, given that I'm here, and banking occurs, well, over there?

I have absolutely no idea how to answer this. Do any of you have suggestions for him?

Comments

[Bartender]

umm.. buy euros?

[jrf]

Yeah, don't.

The dollar is at record lows against almost all currencies. The dollar is obviously oversold, and will rebound. (Think of it this way. The US is ON SALE for anyone with a foreign currency. They can get BRK or GE or JNJ or any of our other wonderful companies for 33% off. They'd be stupid not to.)

My advice: Just save your money, and stop trying to hedge your dollar with plays you don't understand. Enjoy your trip to Europe, and stop worrying. Things will cost too much, just prepare for it now.

[aaktx]

Buy FXE, euro currency trust etf and hold it for while before your vacation. Unfortunately short term capital gains will erode your gains if significant. Vacationing in America will actually get cheaper if the economy tanks.

[Mixer]

Here's the best way:

http://www.everbank.com/001CurrencyAccess.aspx?LinkID=Navigation

I've used them for years, although I haven't withdrawn my Euros in Europe, that is one of the purposes to the account.

Another way would be to transfer money to a PayPal account, then convert to whatever major currency you want. Use your PayPal debit card in Europe to withdraw Euros. I trust Paypal a little less than Everbank due to their exposure to subrime mortgages (ever wonder how they can offer such a good rate on their money market?) but it would be the easiest way to handle the conversion.

- Mixer

[Craig]

For a vacation, likely you will pay more in fees than you will save on such a hedge. Not very advisable in my opinion. One way may be to buy Euro-denominated traveler's cheques today since you will pay for them in dollars.

[Kyle]

While I don't agree the dollar is "destined" to fall against the Euro and Pound, the best way to hedge this would be to buy a Euro or Pound CD from Everbank. They are FDIC insured from default but not from currency fluctuations. The 3-month Euro CD currently pays 2%. But there are no fees to transfer in and out of Euros. You just buy the CD like you would any other. Only problem is, the minimum is fairly high. I think it's $10,000.

[Big Cheese]

You can open an overseas account and keep local currency there. However you must disclose this and the maximum amount (bracketed by USD amounts) held in the account during the year to the IRS. I believe this a TD 91 form.

I would agree with the first commenter that the dollar is 'cheap' now. However it could fall further.

Another currency hedge would be to buy gold which has been stable in a currency basket basis.

-BC

[Gayle]

Wow how much money are you going to spend? Is it really worth going to this much trouble to maybe save a few bucks? I try to keep it simple. In Europe you can use debit and credit cards. Some of the places I go in Asia either don't have banks, or there are trade restrictions that hamper me. I just returned from a country that we have sanctions on trade with. All transactions are conducted in cash, preferably USD of certain denominations. There are places to get more for your money, but Europe at the moment is not one of them.

[limeorchid]

I am in no way an expert in this area however, I have a story to share. My mother in law is Turkish and planned on purchasing a 2nd home there but did not find anything, so she left her money in an account there, (managed by a family member). Due to the weak dollar and the high rate's in Turkey, she is making thousands a month on 50k of secured money. Rates have dropped a bit and the dollar has risen, so she has her contact there on "red alert" to close the account and exchange the lira for USA if need be.

Just a idea to brainstorm, if you can take the risk, which she can.

I just want to pay the electric bill myself.

[Matt]

limeorchid:

That's effectively just currency speculation (though she originally got into it for a more sensible reason). It's not exactly secured, it stall faces currency risk. Might as well just start day trading in ForEx.

Whether it makes sense to leave the money there hinges on whether she still plans to buy a house there some day. If all her future plans are to spend dollars, she should convert the currency while she's ahead and stop trying to time the market.

[Paul Harris]

I would recommend just going to a large bank, a currency exchange at an airport or www.ordercurrency.com and have the current exchange rate of the Euro work for you by holding on to cold hard cash. This would be a great way to hedge your expected drop in the US dollar while still having the ability to exchange those funds if the dollar swings upward.