Posted: 8/4/2007 11:58:28 PM EDT
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I was having a discussion with my brother today, and wanted to see what you guys thought. Suppose the dollar falls drastically, I mean 1929- Depression/Crisis DRASTICALLY but the EURO remains strong (or strengthens). A) Would equity investments in European companies protect you (at least partly) from the drastically falling dollar? B) Or since you have your investment in $$ dollars, would it just be devalued all the same? C) Would this be any different if the investment was held in EUROs as opposed to dollars? D) Forget all this and buy gold, silver and ammo. :-) ** Note ** No, I don't think the sky is falling, just talking diversification with my brother over a beer or 6. |
yes, insofar as the falling dollar makes your non-dollar-denominated holdings increase in value.
foreign holdings can be done one of two ways: by buying the foreign stock in the local currency, or by buying ADR's/ADS's in US dollars. however, any fluctuation of the dollar to foreign currency affects the value of the foreign stock and the ADR equally. so, the dollar goes down, your foreign holdings (stock or ADRs/ADSs) will go up. en.wikipedia.org/wiki/American_Depositary_Receipt en.wikipedia.org/wiki/American_Depositary_Share
purchasing foreign stock is done at your end in dollars, but somewhere along the line those dollars are converted to the "home currency" of the company you just bought. hence, you get the benefit (or the pain) of currency fluctuations even though your end of the transaction was in dollars. let's take an example: the big telecom firm Alcatel-Lucent (ALU) is headquartered in Paris, and trades in Euros on the Euronext Paris exchange. however, their ADR/ADS "ALU" trades on the US NYSE in new york as well, making it easier for US-based investors to buy and sell shares in Alcatel-Lucent. there is a 1:1 correspondence between the Euronext-traded ALU shares and the NYSE-traded ALU ADRs. owning one basically means owning the other, but the two are traded in different currencies. say i buy 1 share of ALU ADRs at a current NYSE dollar-denominated market price of $10. and let's say that 1 USD is worth 1 Euro when i buy ALU. so that means ALU is trading on Euronext at E10 as well. now suppose ALU stays constant for a week on the Euronext, but the value of the USD free falls such that 1 USD is worth E0.5. what have i got? i've got 1 share of ALU. in Paris it's worth E10. at 1USD=E0.5, E10 is $20. so, my 1 share of ALU on the US market is now worth $20 despite the fact that the market price of ALU on the Euronext did not budge. ergo, we make (or lose!) money on the currency fluctuation. ar-jedi ps: the astute observer will note that this type of situation is ripe for currency arbitrage. that is, any time the exchange rate-adjusted market price of the NYSE ADR's is out of sync with the Euronext price, there is money to be made. the more rapid the fluctuation in the USD/Euro exchange rate, the more money will be on the table. |