Category: Currency


China just devalued the Yuan, setting it at 6.4 to the US Dollar, its lowest in four years.

Thus rings another cannon blast in the currency war unfolding in today’s world economy.

The foreign exchange market is always a zero-sum game.  One currency always has to win against another.  A currency can only rise or fall in value relative to another going in the opposite direction.  And in the present global economic climate, most countries want to boost exports and grab a bigger share of international trade by devaluing their currency.  Everyone wants to go in the same direction.  But since a country can only devalue its currency by conversely increasing the value of another, we are now in the present wartime scenario of the currency markets.

currency wars

In a currency war, however, everyone actually risks losing something.

We can look back in history – to the 1930s – when a currency war also erupted in the world.   At that time, then United States President Franklin Delano Roosevelt confiscated gold and authorized the immediate devaluation of the US Dollar by 69%.  Prior to that, countries like Japan, New Zealand, Britain and France had also already left the gold standard and were devaluing their currencies to stimulate their exports.  After the United States, the Swiss, the Chinese and the Dutch also followed suit in devaluing their currencies.  Back and forth, those nations’ economic policies went against each other.  Each nation inching to pull one over the other.  That currency war was eventually resolved – by World War II.

Fast forward to today.  The United States began printing money in a frenzy in 2008 in order to arrest the economic collapse caused by a bursting housing bubble.  In effect, the US was significantly devaluing its currency by doing so.  Brazil was enraged at this, and decried how the western economies had defrauded it in trade.  The European continent, not to be outdone, also began its quantitative easing measures as a means of solving the economic crises that beset it.  Japan then followed. And then China.  In a currency war, each country trying to outmaneuver the rest.  Everyone going back and forth on their wins and losses.  But ultimately, everyone is bound to suffer net losses in trade.

How does an individual protect himself in a currency war?

Don’t be limited to onshore investments (advice I learned from lom).  Some economists are predicting a collapse of the US Dollar within 2016.  If an American has one hundred percent of his asset holdings denominated in US Dollars, he is bound to lose everything he has should such a collapse occur.  However, if the individual holds his assets in different currencies, he is hedged against a significant drop in the value of the US Dollar.  Our current global economy is characterized by highly interconnected markets and greater accessibility to all those markets.  Innovations in the bond, equity and foreign exchange markets have also increased the options available to investors.  An investor can and should spread his eggs across many and varied baskets especially since diversification is possible now, more than ever.   Hedge funds also offer many possibilities not only to be protected but to also even profit from the collapse of a currency such as the US Dollar.  Foreign mutual funds invested in foreign bonds, currencies and gold are also another investment option.

Keep assets as liquid as possible.  If one’s portfolio is tied up in real estate or art that require a longer turn-around time, he might not be able to quickly respond and adapt to sudden changes in market conditions.  Having liquid assets makes an investor more mobile and enables him to shift his assets from one class, market or geographic location to another.

Hold some investments in gold (or similar precious metals).  Gold has always been considered the reserve currency when all other reserve currencies fail.  This is primarily because no one can create gold by fiat.  It has a fixed and limited supply, contrary to the currencies we have today, which can be set and reset by governments at whim.  At the same time, gold has shown itself to have an inverse relationship with the US dollar through history.  Investors run to gold in times of market uncertainty as it has proven itself as a reliable store of value time and time again.

China recently revealed that it has been quietly hoarding gold reserves since 2009, to the tune of an average 100 metric tons per year.  Although analysts anticipating a possible rate hike by the United States Federal Reserve are not so bullish on the price of gold, some investors, like the People’s Bank of China, continue to build their stockpile of gold as a means of diversifying their portfolios.

In summary, the ravages of a currency war on nations’ economies may be inevitable, but individual entities can still take precautionary measures that will help them survive and even thrive under such harsh economic conditions.