How to deal with the falling dollar
January 8, 2008
A lot has already been written explaining the reasons behind the fall of the US Dollar but very, very few have offered solutions on how to deal with it. Here we give some suggestions on how to face the challenge of a depreciating dollar.
The fall of the US Dollar is very much apparent in the Philippines, where the Peso currency appreciated by as much as 18.8% in 2007, making it the year’s best performing currency in Asia.
Although the peso rise has brought economic benefits such as lower inflation and higher purchasing power, it also hurts exporters who are currently struggling with rising prices and Overseas Filipino Workers (OFWs) and their families who are now getting less from their dollar earnings.
What to do then to deal with a depreciating dollar and appreciating peso?
Convert your dollars
If you have absolutely no business holding on to the US Dollar, you will be better off if you exchange it to your local currency. Assume that you got your dollar at a time when the peso-dollar exchange rate is P50 : $1. Now that the peso has risen to P41, you are technically losing P9 for every dollar you hold. So if you have $10,000, you already lost P90,000!
Find the best exchange rate in town
When converting dollars, scout for the currency exchanger that offers relatively higher rate. Those found at airports and tourist zones usually have lower rates. Currency exchange counters in SM, Robinsons, and other malls also do not offer the best rate.
Black markets, especially in Ermita, Manila, have higher rates but make sure you are not duped with fake notes. In Makati, Sanry’s Foreign Exchange and Czarina’s Foreign Exchange (both in Glorietta), among others, offer better rates.
Be your bank’s Preferred Client and get higher rates
Not everyone knows that as a Preferred Banking or VIP client of a bank, it is possible to negotiate for a higher exchange rate. Last week, a friend of mine who is a VIP client of the Bank of the Philippine Islands (BPI) was able to convert his dollars at a negotiated rate of P41.00. The bank’s rate that day was P40.90 while exchangers in black markets offer P40.92. The difference may only be 8 cents compared to the black market rate, but hey, it’ still 8 cents per dollar!
Inquire with your bank how you can be a VIP or Preferred Banking Client in order to be eligible for the preferred exchange rate. The minimum amount you have with them may vary, but some bank branches upgrade clients to Preferred Banking status if they have at least P300,000 deposited.
Hedge with your bank
OFWs who regularly send dollars to their families are the ones primarily affected by the sharp decline of the dollar. One way to address this is to enter into a hedging or forward contract agreement with your bank.
A “forward contract” allows an individual to lock in the exchange rate in future conversions. For example, the exchange rate now may be $1 : P41 but you expect the dollar to further slide. You approach your bank and ask if you can have a forward contract with them fixing the exchange rate at, say, $1 : P39 for the next 6 months.
If the peso indeed rose to P38 versus the dollar within the next 6 months, you are better off exercising the forward contract because the applicable exchange rate to you is P39 : $1.
Inquire with your bank regarding their policy on foreign exchange transactions and forward contracts. The Development Bank of the Philippines (DBP), for one, has a hedging facility exclusively offered to OFWs.
Look for high-yielding dollar investments
Those who wish or have the need to retain dollars should place their dollar holdings in high-yielding investments to offset the value lost as the dollar depreciates. Investment banks such as HSBC, JP Morgan, and AIG, among others, offer Global Equity and Emerging Markets Equity Funds that yield above-average returns, sometimes reaching 30-60% return per year.
Inquire with them how you can place money in their investment offerings. Do note, however, that since these funds are invested in equities, the risk is also high. Assess yourself first if you have the appropriate risk tolerance before investing in these high-yield, high-risk investments.
Invest in gold
Whenever the dollar declines in value, people run to gold for safety. This is because gold is priced in dollars and as the dollar depreciates, gold becomes cheaper. As more and more people buy gold, its price goes up. Recently, the price of gold has hit record high because the US dollar continues to lose its value.
If you have no way of purchasing and acquiring actual gold, an alternative would be to invest in companies that deal with gold and precious metals. In the Philippines, gold mining companies such as Philex Mining Corporation (Stock Code: PX) and Lepanto Consolidated Mining Company A (Stock Code: LC) are currently rallying because of the surge in gold prices.
The US dollar is further expected to fall this year and, as a wise investor, you should be proactive in dealing with it.
Do you have your own ways of dealing with the falling dollar? Share it to us!
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