As a long-term investor managing your own diversified investment portfolio, there is not much you can do to hedge against short-term or daily declines in the value of the U.S. dollar. However, you can structure your portfolio to make it less vulnerable to downward movements in the dollar, primarily by expanding your portfolio into additional asset classes.
Investing directly in gold, such as via bullion, provides an effective hedge against a falling dollar. Transactions for gold take place in terms of U.S. dollars, so if the dollar drops in value, the value of gold rises. Gold has always been viewed as a safe haven for funds during times of crisis. The U.S. dollar used to be backed by gold, but it is not anymore. Therefore, it is natural for investors to turn to physical commodities such as gold in favor of paper money, because the institutions that issue paper money can be vulnerable to a wide variety of risks not attributable to gold.
Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities are fixed-income securities issued by the U.S. Treasury that are indexed for inflation and deflation. The principal of TIPS rises in step with inflation, inflation being one measure of the dollar’s loss in purchasing power. You have to differentiate between inflation and rising interest rates when investing in TIPS, because TIPS only provide protection against inflation. However, if interest rates rise while inflation remains flat, TIPS holders would be subject to opportunity cost, because similar Treasury notes would have higher yields than TIPS.
Investing in real estate can provide a hedge against a declining dollar so long as it is done appropriately. Purchasing a home protects you from potential increases in rent, which often accompany inflation connected to a declining dollar. You can also benefit from the mortgage interest expense deduction. If you purchase a home while locking into a historically low interest rate, your future payment amounts are fixed. This is beneficial, because if the value of the dollar declines, you will be paying down your mortgage with dollars that are worth less than as of the purchase data.
If the value of the dollar decreases, this means that it is decreasing relative to the currency of other countries. Currencies of foreign countries with rising interest rates and relatively low payment obligations to other countries may make good investments when the dollar falls. One example is the Chinese yuan. The Chinese government has long been criticized for artificially depressing the value of the yuan in order to maintain an advantage for its manufactures exporting goods to other countries. However, as of 2013, China has started to ease its monetary policy, allowing the yuan to increase in value. Another option is hedging against the declining dollar using currency trading. Currency trading is now accessible to individual investors via easy-to-use and inexpensive trading platforms.